Spanish Free-to-Air TV March 2006 [2006-08]

Executive Summary

The Spanish government has opened up the country’s free-to-air (FTA) TV market with the launch of two new analogue terrestrial services and a relaunch of digital terrestrial television (DTT). This report describes the changes and assesses the short-term impact on the leading players. Although we expect the Socialist government to do what lies in its power to assist the new analogue terrestrial entrants, we anticipate that both will struggle to make profits. Meanwhile, the DTT space will be more interesting for the takeover opportunities that it presents to the leading terrestrial commercial groups.

In autumn 2005 an estimated 71% of Spanish homes had terrestrial-only reception, giving them access typically to six or seven national and regional channels, as well as assorted unlicensed local stations. The changes include: • The replacement on 7th November 2005 of Sogecable’s Canal+ on the terrestrial network with Cuatro, a FTA general entertainment channel • The relaunch on 30th November 2005 of DTT with up to 22 free channels including simulcasts of the main terrestrial channels • The launch on 27th March 2006 of a second new national FTA general entertainment channel, La Sexta

We anticipate rapid take up of DTT adapters. Factors that will help to drive growth are the threefold expansion of channel choice, wide 80% technical coverage at launch, large volume of library material at the disposal of the new channels, and low costs of set-top boxes (STBs), currently priced at €55-80. We project DTT take-up to grow from circa 550,000 homes at the end of 2005 to 2.9 million by the end of 2007. Still, the government target for analogue switch-off in 2010 appears highly unrealistic.

Although DTT growth promises significant long-term effects, the immediate issue is the impact of the analogue terrestrial channel launches on the FTA TV landscape. Whereas less than 5% of homes received most DTT channels at the end of 2005, the analogue FTA terrestrial channels will be receivable in most homes from the start.

The new FTA analogue channels are also investing much more heavily than the new DTT channels in programming and we expect them, on overall channel viewing and advertising market shares in the short-term, to have greater impact than the DTT channels or multichannel growth generally. We project the overall viewing share of today’s four leading analogue terrestrial broadcasts (TVE, Antena 3, and the regionals) to decline from 88% in 2005 to 74% in 2007, and that Cuatro and La Sexta will make up more than two thirds of the balance.

Media François Godard +39 0815 520601 [email protected] Spanish Free-to-Air TV March 2006

Table 1 Telecinco and Antena 3’s combined advertising revenue, 2003-2007

2,000 60%

1,800

50% 1,600 €000

1,400 rket share a

40% M

1,200

1,000 30% 2003 2004 2005 2006f 2007f

[Source: Enders Analysis]

The impact of the new analogue FTA competition on Antena 3 and Telecinco will, however, be contained. Although the recent TV advertising boom, which saw 32% growth between 2003 and 2005, is expected to slow, further increases of 8% in 2006 and 6% in 2007 are still expected. They will cushion the impact of Cuatro and La Sexta. In addition, Antena 3 and Telecinco will be assisted by the following: • The government bill to reform the status of the public broadcaster RTVE will include measures for reducing the volume of airtime carried by TVE and La2 • Antena 3 and Telecinco will command a significant premium over the new analogue entrants due to their much higher viewing shares • Early indications are that Cuatro La Sexta may gain viewing share, but at the expense of channels other than Antena 3 or Telecinco

The net result is that we anticipate overall growth in Antena 3 and Telecinco revenues of 4% in 2006 and 2% in 2007 in spite of some audience erosion due to the new analogue entrants and multichannel growth.

Of much greater concern is the future viability of the new entrants. Cuatro holds important advantages over La Sexta in terms of higher analogue technical reach (97% at launch versus maximum 70% ever for La Sexta) and also a legacy of programmed handsets and established TV shows from the days of Canal+. La Sexta at least has Mexico’s Televisa and Spain’s Mediapro-Árbol as shareholders, both top producers in their domestic market. Yet, with both broadcasters expected to have annual opex of around €225-250 million versus our short-term projection of little over €350 million in combined advertising revenues in 2007, we strongly doubt if the Spanish TV market can sustain one, let alone two new market entrants without further government intervention.

We foresee little immediate impact of DTT on the Spanish TV landscape in audience or advertising terms. The main point of interest is that the government has allocated DTT capacity by giving a certain number of channels to the existing national terrestrial channel operators. There exist no multiple channel ownership restrictions for DTT (before switch-off) as with analogue, nor rules to prevent DTT channel owners from acquiring more DTT channels from other owners post launch. In short, the conditions look ripe for market consolidation over the next few years.

2 Spanish Free-to-Air TV March 2006

Expansion of the Terrestrial Broadcast Offer

In 2005 the Spanish government significantly altered the terrestrial TV landscape. Like other European governments, it presided over the launch of a digital DTT platform that largely preserved a terrestrial oligopoly. In addition and of greater commercial significance in the medium term, it allowed the launch of two new national terrestrial analogue free-to-air channels.

Analogue terrestrial

Approximately 71% of the Spanish population of 15 million TV homes has only terrestrial analogue reception. The two new national licences represent a sizeable increase in channel choice, which has consisted in the past of four national FTA channels, one pay-TV channel with an FTA window, usually one or two regional autonomic channels and an assortment of unlicensed local channels.

The expansion of FTA choice has occurred in two stages1: • The government granted Sogecable a change in its licence terms in July 2005 that allowed it to close the terrestrial analogue and digital broadcasts of the premium pay-TV channel Canal+ and replace them with a national FTA service. Canal+ is now only available on the Digital+ satellite platform and also on the new FTA channel, named Cuatro, launched on 7th November 2005 • Also in July 2005, the government issued a call to tender for a second new national FTA terrestrial analogue channel. On 29th November it awarded the licence2 to La Sexta, a consortium of Mexico’s Televisa and producers Grupo Árbol and Mediapro from Spain, which are now in the process of merging. La Sexta will launch on 27th March 2006. Its licence also includes two national DTT channels for simulcast and a themed service

Most Spanish terrestrial analogue viewers will have a choice of six rather than four and a bit national channels by mid 2006, plus some regional and local channels as before (Table 2). The national choice is to comprise two public channels from Radiotelevisión Española (RTVE), and four private commercial channels under separate ownership.

Table 2 FTA terrestrial analogue channels

TVE1, TVE2, Antena 3, Tele 5, Cuatro, National La Sexta (launch in March 2006) Regional Up to three by region Local About 800 unlicensed stations

[Source: Enders Analysis]

Of the two new channels, Cuatro has positioned itself as a general entertainment channel, with a similar mix of first-run domestic sitcoms, news, sports and movies as Telecinco, Antena 3 and TVE1. Cuatro has built on audiences to Canal+’s former unencrypted windows, keeping some of its most popular programmes, notably the daily political puppet satire show.

1 Decisions behind the two new analogue terrestrial licences were taken separately and have widely been seen as politically motivated. In contrast to Telecinco and Antena 3, which are seen as politically hostile, the new licensees are regarded as being close to the Socialist government. In addition, La Sexta’s location in Barcelona could help win support in the national parliament for the minority Socialist administration from the Catalonian nationalist party (CiU). 2 The licence of La Sexta was granted after a call for tender in which only one other project was presented. Government opponents argue that the analogue frequencies used by La Sexta could have been given to DTT instead. 3 Spanish Free-to-Air TV March 2006

Public releases from La Sexta’s shareholders also point to a full-scale general entertainment channel, but with a schedule which avoids head on competition with the major broadcasters. One of the shareholders, Grupo Árbol, is the leading independent producer in Spain and owns a library of very popular domestic series.

Cuatro holds a distinct initial advantage over La Sexta in that it has a 97% technical reach of Spanish TV homes, putting it on a par with Telecinco and Antena 3. In contrast, La Sexta will at best reach only 50% of TV homes at launch and – on condition that a number of frequencies now occupied by squatters are freed up – will eventually achieve analogue coverage, rising to a maximum of 70%. The channel plans to make up for the remaining 30% through DTT and cable distribution.

DTT

Digital terrestrial launched as a pay-TV bouquet and FTA service in 2000. Token simulcasting of the existing national analogue channels continued after the collapse of the pay-TV component, Quiero TV, in May 2002. In addition, two new FTA digital channels, Veo TV and Net TV were launched in the vacuum caused by the disappearance of Quiero TV. During this period, STB sales were practically nil. It was not until December 2004 that the government announced a re-launch of DTT. The necessary legislation was enacted in June and July and the re-launch took place on 30th November 2005.

The government ruled out a bidding process for the channel licences. It elected instead to allocate bandwidth to the national analogue terrestrial licensees, including La Sexta (plus to the sixth analogue channel), but in exchange for a number of programming, coverage and DTT-promotion commitments3. Terms varied by licensee. In summary: • RTVE was granted a full multiplex and one channel to fill as it chose; that is, apart from the obligation to simulcast its two analogue services. In practice, it has launched four extra DTT channels, of which two are new and two already feature on other platforms • Antena 3, Telecinco and Sogecable were each allocated two DTT channel feeds in addition to their simulcast channels • Net TV and Veo TV, which had operated DTT channels since 2002, were licensed one extra channel feed each • La Sexta’s licence comprises two DTT channel feeds, including one to simulcast its analogue service • The regional governments each had one full multiplex for regional services on which those already operating regional channels had up to the end of 2004 to launch DTT simulcasts. Some have licensed additional private and others public channels on their allocated capacity • The regional governments had a further obligation to license up to four DTT channels for each of the country’s 281 local areas before the end of 2005

We observe that, in contrast to some other European countries, including the UK, the DTT-licensing process in Spain is largely channel based and has created no role for a commercial multiplex operator. Among the national licensees, only RTVE has any freedom to play with non-simulcast capacity. We also note two problematic aspects of the regional local service allocations. First, the allocated capacity is already occupied

3 In fact, the government decision to award DTT licences in this manner was finally confirmed only after Antena 3 and Telecinco dropped plans for a legal challenge to the change in the Sogecable terrestrial licence. Plans to cut advertising airtime on RTVE channels (see below) have also helped ease concerns about the increased competition.

4 Spanish Free-to-Air TV March 2006

in most cases by unlicensed services and it is unclear how the space is to be freed up. Second, in cases where local digital licences have been granted to existing analogue operators, it is not evident why they would accept switching abruptly to digital come the end of 2007 when the great majority of households could still be on analogue.

The new DTT platform has no brand name like Freeview. However, the broadcasters, in co-operation with government and the transmission companies, have had to finance jointly a promotional body called Pro TDT.

Table 3 Spanish DTT channel line up in Madrid

Channel Programming Owners La Primeira General interest (simulcast) La 2 General interest (simulcast) Canal 50 años* Archives Televisión Española (State) Clan TVE* Kids Canal 24 Horas News Sports Antena 3 General interest (simulcast) Antena 3 (Planeta/De Agostini 35%, RTL Antena Neox Kids Group 17.3%) Antena Nova Women Telecinco General interest (simulcast) Series Telecinco ( 50%, Vocento 13%) Sports Cuatro General interest (simulcast) Sogecable (Prisa 44.5%, Telefónica CNN+ News 17.3%) 40 Latina Music Veo TV Entertainment Recoletos 25%, Unidisa 25% n/a Entertainment Net TV Entertainment Vocento (75%), Grupo Árbol (13%) Flymusic Music TVM** General interest (simulcast) (Region) La Oltra** Minority interests Onda 6** Entertainment (simulcast) Vocento Launching by June 2006 La Sexta General interest (simulcast) Grupo Árbol /Mediapro 40%, n/a n/a Televisa 40%, WPP 20%

* Sharing a single 24h feed ** Regional coverage [Source: Enders Analysis]

In total, the national DTT allocation amounts to 22 channels, of which 19 are currently in use, as displayed in the sample line-up for Madrid (Table 3). In our view, the output will be more noticeable by its quantity than by its quality or its freshness. Antena 3 told us that it had set a budget for its two extra digital channels at €12 million per year, half of which was to cover transmission costs. Meanwhile, we understand that Telecinco aims at 'zero content costs” and €3-4 million in annual transmission costs per channel. Both broadcasters own significant libraries that can feed their new services at no extra direct cost. The news and music services from Sogecable are also expected to cost little more besides their transmission costs.4

4 All DTT channels are on basic cable and DSL. Those of TVE and Sogecable are also on satellite, thereby insuring a much larger potential audience than the digital terrestrial universe provides. 5 Spanish Free-to-Air TV March 2006

Forecast Growth in DTT Reception

We expect rapid growth in DTT reception for the following main reasons: • Large base of terrestrial-only homes. Only 30% of the household population currently subscribes to satellite, TV-over-DSL or cable • Significant enlargement of national FTA offer from five/six to 22 broadcast channels covering a broad mix of general entertainment and specific genre programming (i.e. news, sports, kids and music) • Simple consumer proposition of a one-off payment and wide extra FTA choice; • Large volume of entertainment programming originated in Spanish, such as might allow the leading commercial broadcasters to broadcast attractive schedules for their new channels at low incremental costs; • National and regional government support, including advertising • Low cost of decoders, which can now be purchased in Spain for as little as €55; • Wide technical coverage, currently 80%, but required to reach 90% for at least the main broadcasters by the end of 2008 and 95+% by the target analogue switch-off date of April 20105

In addition, press reports indicate strong support among the regional governments, which have to face elections in 2007. We note too that RTVE’s status and financing is currently under parliamentary review, and it could be in its best interest to show strong backing of the government plans by using DTT to offer a wider choice of public service programming. La Sexta, which needs DTT in order to push national availability of its main channel above 70%, may likewise have an incentive to push DTT growth.

There are, of course, certain negatives. As mentioned, the DTT platform has no brand name, no clear leadership, and low programming investment by the main commercial channels. There are also technical issues to overcome. Possibly the main technical barrier concerns the need to upgrade most building aerials and networks, with around 70% of households being located in large apartment blocks, although this may prove only a limited obstacle. Already the government was able to announce in March 2006 that 150,000 buildings, containing 3.1 million homes, had been upgraded to enable digital terrestrial reception. Upgrades are estimated to cost about €1,000 per building, and work out at just €50 per apartment. Furthermore, upgrades of this sort were carried out smoothly on a massive scale when private TV launched in 1989 and 1990. In addition, many households will be able to pick up the DTT signal with an indoor aerial.

Arguably, the launch of two new general entertainment services will also temper the urge to go digital, although Cuatro is not wholly new as it takes over from Canal+, which used to broadcast six hours daily unencrypted, and La Sexta goes on air only in the spring in a staged roll-out. Consequently, we think that the analogue additions will have had very little impact on launch sales of DTT STBs at the end of 2005.

Overall, we think the positives outweigh the negatives. In support of this view, press reports indicate strong early STB sales. According to provisional estimates from the electronics industry association, ASIMELEC, during the last two months of 2005 350,000 STBs were sold, in addition to an existing base of 460,000 boxes that included legacy Quiero STBs as well as advance sales in 2005 which were generated by pre-

5 The requirements are contained in the licences and vary by licensee. Initial coverage obligations for Veo TV, Net TV and La Sexta are more relaxed than for the five national analogue terrestrial broadcast services at the time of launch. TVE must reach 98% in April 2010 and the channels of Telecinco, Antena 3 and Sogecable must reach 96% at that date. 6 Spanish Free-to-Air TV March 2006

launch publicity. From this data we estimate an installed base of about 550,000 residential homes.6

After reviewing the issues and evidence to date, as well as examining conditions and trends in other European countries, we have arrived at the initial forecast of almost 3 million DTT homes by the end of 2007 (Table 4). At least 2.5 million homes out of the total DTT base at the end of 2007 will be DTT only households (i.e. excluding dual platform overlap with digital satellite and cable homes). For comparison, ASIMELEC expectations of 1.8 million STB sales in 2006, implies a somewhat higher cumulative total of nearer to 2 million than our forecast of 1.4 million DTT homes.

Table 4 DTT penetration, 2003-2007

HH 000 2003 2004 2005f 2006f 2007f TV homes 14,233 15,032 15,200 15,400 15,600 Satellite, cable and DSL 3,650 3,734 4,435 4,850 5,275 DTT 100 125 550 1,400 2,900 Penetration 1% 1% 4% 9% 19%

Note: DTT forecasts include platform overlap with satellite and cable, but exclude installations in second homes, commercial premises or connected with PCs [Source: Enders Analysis]

Some regional governments are rumoured to be considering plans for DTT adapter subsidies. If this happens, we think the impact would be limited. In the first place, any subsidy would probably have to be available to cable, DSL and satellite TV users as well as DTT homes in order to meet European Union requirements of platform neutrality. Second, and partly reflecting this, subsidies would probably be limited to interactive STBs and encourage those intending to buy a DTT STB to upgrade their purchase decisions, rather than add to total sales.

Finally, the June 2005 Broadcasting Law has brought forward the date of analogue switch-off from January 2012 to 3rd April 2010. Without any extra government initiative, such a short deadline appears unrealistic in view of the logistical issues of expanding the reception base at the very high rates required to deliver the switchover objectives.

Impact on FTA and Pay Markets

Audiences

In 2005, the four leading groups in FTA broadcasting – RTVE, Telecinco, Antena 3 and the Forta association of regional autonomic channels – held an 87% share of total viewing (Table 5). Their combined share will decline significantly in the next two years as a consequence of: • The launch of the two new national commercial terrestrial channels • Growth of DTT reception • Growth of cable, TV-over-DSL and satellite reception

Much of the most immediate and powerful effect in the next two years will come from the two new analogue channels and chiefly as a result of their high initial penetration (Cuatro - 97%; La Sexta - 50-70%) combined with large programme budgets. In

6 In March, the government estimated the total STB base at 1.1 million. This would suggest a current population of about 800,000 homes equipped with DTT reception. 7 Spanish Free-to-Air TV March 2006

particular, Cuatro will inflict the biggest as well as earliest damage to the other terrestrial channels by virtue both of its higher technical reach and an annual programme budget of €160-180 million that dwarfs the combined budgets of all the new digital terrestrial channels, which we estimate as below €50 million.

Table 5 Audience shares, 2005

7.4% 2.4% 19.6% 3.5% TVE1 TVE2 Telecinco 17.6% 5.8% Antena 3 Forta Local Canal+/Cuatro Others

22.3%

21.3%

[Source: Enders Analysis from Sofres]

Digital platform growth will ultimately have a larger diminishing effect on channel audience share among the current leading terrestrial group. But, at the rate of 500,000 to 1,000,000 household additions per annum across all TV homes over the next two years and with most of it coming from DTT growth, where we expect smaller audiences, we think it will cause little audience erosion to the main terrestrial analogue channels in the short term.

Table 6 sets out our short-term forecasts of trends in national viewing shares. The following are our main assumptions: • Cuatro, which has averaged a more or less flat 5% audience share over the first four months since launch, will edge towards its target 7-8% for the end of this year7, although we think it will have to increase its programming spend above the current budget in order to get there. We are looking at an average of around 6% in 2006 and perhaps 8% in 2007 • La Sexta, which launches on 27 March 2006, has the disadvantage of a maximum 70% analogue reception. Depending on the degree of interference from unlicensed channels and additional problems to do with resetting aerials, the actual percentage of TV homes able to receive it could be well below this figure. On the other hand, it will have access to a large library of programmes from its shareholders. In addition, it may provide some coverage of the June 2006 football World Cup if its bid of between €90 million and 120 million (according to different reports for televised rights) is successful. The prime motive for this outlay is to encourage viewers, where necessary, to adjust their aerials in order to be able to receive World Cup coverage and add La Sexta in the sixth or seventh position on their remote control handsets. We have assumed a national viewing share of 2% in

7 Figures for the first three weeks of March suggest that the share has risen slightly to above 5.5%, having averaged 5.3% in February. 8 Spanish Free-to-Air TV March 2006

2006, rising to 4% in 2007 with consequential benefits of full year broadcasting and better reception • Pay-TV satellite and cable channels hold a collective 33% viewing share within their universe, which we expect to remain constant in 2006 and 2007. They will add a small amount to audience erosion as a consequence of subscriber growth. • FTA DTT channels will also hold a constant viewing share at the current estimated level of 15% (within their universe), although this might be expected to increase as the platform’s line up widens and programming investment rises • Local channels hold a collective national viewing share of 3%, which will remain unchanged over the next two years

Table 6 Audience shares by channel type, 2003-2007

100% 5.0% 6.1% 7.4% 2.7% 3.0% 3.0% 10.0% 11.0% 90% 2.4% 2.1% 2.4% 3.0% 3.0% 80% 8.0% 12.0% 70% 60% 50% 89.9% 88.8% 87.6% 40% 79.0% 74.0% 30% 20% 10% 0% 2003 2004 2005 2006 2007

Big four: TVE, A3, T5, Forta Canal+/Cuatro & Sixth Channel Local TVs Multichannel

[Source: Enders Analysis]

The net result is erosion of the combined share of the ‘big four’ (i.e. RTVE channels, Antena 3, Telecinco and the Forta association of eight regional autonomic broadcasters) from 88% in 2005 to 74% in 2007 (Table 6). However, we believe the impact on Antena 3 and Telecinco’s share of advertising revenue will be much less than the viewing share figures suggest.

Advertising

Antena 3 and Telecinco have both recorded spectacular advertising revenue growth over the last three years. Their estimated combined advertising revenues of €1,745 million in 2005 were up 56% on 2003. The increases reflect the combination of a booming advertising market (fuelled by Spain’s strong economic performance) and audience gains at the expense of RTVE. The increases in spend were accompanied by higher volume of spots sold, although this reached a ceiling in 2004 and fell back slightly in 2005.8 Recent market growth has come instead mainly from price increases, with some extra help from non-traditional advertising such as product placement.

The two channels, especially Telecinco, have also innovated with new formats for spots and breaks. This partly explains why Antena 3 and Telecinco have stolen market share from the less commercially dynamic regional channels of Forta despite the latter’s steady audience performance, according to advertising agencies we spoke to.

8 The media buying agency Media Planning estimates that advertising spots took up 16.9% of Antena 3 airtime and 16.4% of Telecinco airtime in 2005. 9 Spanish Free-to-Air TV March 2006

Total advertising growth is expected to slow over the next two years and with it Antena 3 and Telecinco are expected to see their growth rates fall back to a pace below that of the overall market. Even so, we believe that the extra growth will more than contain losses due to audience erosion by the new analogue terrestrial channels and digital growth. We judge that the effect of audience fragmentation could be limited for at least three reasons.

First, there should be a cut in advertising time on the two RTVE channels. The bill to reform RTVE’s status that is now passing through parliament will implement European airtime quota regulations, which limit the number of advertising breaks during films and children’s programmes. In addition, the government has discussed reducing the maximum advertising airtime minutage from 12 to 9 minutes. Such a move would hurt RTVE, which filled 14% of its broadcast airtime with advertising in 2005, mainly by significantly reducing its ability to capitalise on peak time ratings (though it does not currently reach the 12 minutes limit). RTVE has recently already seen a sharp drop in advertising revenues due to a government mandate in 2004 which obliges it to broadcast more public service-type programming during 2004. This led to a 4% drop in H1 advertising sales in spite of the strong overall growth in TV advertising revenues.

Second, we expect Antena 3 and Telecinco to command a significant premium due to their very much larger audiences and the consequently greater negotiating strength of their airtime sales departments. At least in the case of Cuatro, however, the disadvantages of its lower audience share of a little over 5%, is offset by the fact that it reaches a younger adult audience (as revealed by its first three months of ratings), which is more attractive to advertisers.

Third, early reports after the launch of Cuatro have shown it to be taking most of its audience from RTVE and the regional autonomic channels.

Table 7 Advertising revenue by channel type, 2003-2007

€ million 2003 2004 2005 2006f 2007f Telecinco + Antena 3 1,114 1,479 1,737 1,809 1,840 TVE 693 732 704 690 700 Forta 348 368 382 360 348 Canal+/Cuatro + La Sexta 34 39 54 223 355 Others 41 59 74 105 135 Total 2,230 2,677 2,951 3,187 3,378

[Source: Enders Analysis]

In preparing our own short-term forecasts of TV advertising revenues (Table 7), we have made the following assumptions after talking with leading media buyers: • Total TV advertising revenues will continue to grow strongly, but at a slowing rate (8% in 2006 and 6% in 2007) • RTVE revenues will dip slightly due to the combination of government actions and audience loss to the new arrivals, which will be greater than for Antena 3 and Telecinco. The figure of €690 million for 2006 is the broadcaster’s own forecast • Forta channel revenues will suffer marginal erosion in 2006 and 2007 despite the growing market as they appear more exposed to the new entrant’s competition for audiences • For reasons stated above, Cuatro and La Sexta will generate lower advertising revenue per audience share point than Antena 3 and Telecinco. Cuatro should

10 Spanish Free-to-Air TV March 2006

manage to build an ad share equal to its viewing share (notably thanks to its valuable younger audience profile), but La Sexta, with its limited coverage, will be lucky to rise to two thirds of its audience share. We therefore expect a combined ad share of 7% in 2006 (vs. 8% audiences) and 10.5% in 2007 (vs. 12%) • Other channel revenues will rise at the higher rates of 42% in 2006 and 28% in 2007 (from a very low base), building on the recent trend for existing cable and satellite channels and widening DTT reception

These assumptions leave the balance of total TV advertising growth as might be expected by Antena 3 and Telecinco. The projected growth of around 4% in 2006 and 2% in 2007 is significantly slower than in the two previous years, but still higher than leading commercial broadcasters in many other countries can expect. Our forecast is an average for the two channels, although actual individual performances are likely to be uneven. The main downside risk would be a change in government policy which would allow RTVE to resume more commercial programming and more aggressive sales.

Prospects for new entrants

Free-to-air analogue terrestrial channels: Cuatro and La Sexta

The long history of commercial TV in Europe ought to be a warning in itself that, in the absence of regulations which provide a structure for market competition, there has rarely ever been room for more than two profitable free-to-air general entertainment broadcasters fighting with gloves off for advertising revenues. It is too early to pronounce on the long-term prospects of Cuatro and La Sexta, but if our forecasts in Table 7 prove correct, both channels will run into severe trouble in the next two years as advertising revenues fall well short of operating expenses. We concur with the view of one analyst that “there’s simply no space for two new networks in Spain’s market, maybe not even for one of them”9.

Cuatro’s planned opex of €225-250 for 2006 is roughly half that of Telecinco or Antena 3.10 On this level of outlay, a 7% advertising share in 2007 could achieve breakeven; however, it could be much more than this if Sogecable feels compelled, after a sluggish start, to beef up its programming budget in order to reach its audience objectives. Moreover, the general entertainment programme model espoused by Sogecable forces it to compete head-on for talent and rights across practically all genres, exposing it to the risk of cost inflation.

Sogecable has unveiled a range of scenarios for EBITDA in 2008, from €40 million to €250 million. In our view, the slow start presages net annual losses for at least the first three years. We think the lower value of €40 million is the very best it can hope for while the upper value of €250 million is merely wishful thinking.

Prospects look even tougher for La Sexta with its lower technical reach, although it has the advantage of being backed by owners with big Spanish-language libraries. The shareholders have announced plans for a four-year “total investment” of €491 million before reaching breakeven in 2010. Assuming a similar level of advertising revenues of approaching €500 million over the same period, this would suggest similar annual opex

9 Comment from Deutsche Bank reported by Dow Jones Newswires, 19th December 2005. 10For comparison, unconsolidated corporate accounts for 2004 show operational costs for Telecinco and Antena 3 of €465 million and €507 million respectively.

11 Spanish Free-to-Air TV March 2006

in 2006 and 2007 to the €225-250 million planned by Cuatro. With the disadvantages of its lower technical reach and the competition stacked against it, we think La Sexta may find it an uphill struggle to build up to the circa 8 or 9% audience share that it will need for breaking even in 2010. The first task is for it to win televised broadcast rights to the World Cup in June and that is by no means certain, especially as La Sexta cannot technically satisfy the requirement of national coverage.

New DTT channels

The new DTT channels may expect very meagre advertising revenues in the short- term, given their low reception and very low budgets. At the same time they pose much less of a financial risk than the analogue terrestrial channels. Instead interest lies more in the prospect of mergers. Whereas, the Broadcasting Law prohibits an investor from owning stakes in excess of 5% in more than one national analogue channel, it sets no limits for DTT services. Hence it is that Vocento, for example, has a 75% share in Net TV and 13% share in Telecinco, while Grupo Árbol and Mediapro, which are in the process of merging, hold a 40% share in La Sexta and will jointly assume Grupo Árbol’s 13% share in Net TV once the merger has gone through.

In light of the lack of restrictions on multiple shareholdings in digital terrestrial channels, Veo TV and Net TV, each of which has been awarded two DTT licences appear prime acquisition targets for the four private analogue broadcasters. If the analogue terrestrial market proves to be as tough as we think it might be, it would not come as a total surprise to see Antena 3 and Telecinco extend their grip over commercial analogue terrestrial TV into DTT via extra channel acquisition when the time is ripe.

Finally, local markets may present additional further opportunities for digital terrestrial expansion by the main broadcasters. Today, both Prisa and Telecinco operate national syndication services of uncertain legal status, by which they supply programmes to local stations and sell advertising on their behalf. In addition, Vocento, another DTT licence holder, also owns about 30 local stations, including Onda 6, which holds a DTT licence in the Madrid area. There is, though, much confusion about the digitisation process as the 17 regions rush to finalise their local licence awards for a total of 281 areas, with up to four channels per area (in fact, they were required to issue them by the end of 2005). As discussed earlier, the changeover from local analogue to local digital seems to have every chance of proving an organisational and legal mess.

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