Strategic Analysis of the Commercialisation of Pay Television in Spain

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Strategic analysis of the commercialisation of Pay Television in Spain

Josefa García Mestanza Rafael Ventura Fernández Department of Economics and Business Administration University of Malaga

Abstract In our country, new technological conditions and the deregulation of the television industry have led to the emergence of companies that are using commercialisation formulas of their services that condition access to consumption, giving rise to two types of different services (one paying and the other open), which, in turn, use different sources of financing (advertising or pay per view). In view of these changes within the national context, we have analysed the characteristics of the pay television service and its main determining factors in the immediate future. To that end, we have described the main market agents of this type of television, the commercial formulas used, the contents distributed and future market trends. In this respect, we have considered the possible development of the business map, progress in the different distribution networks and consumption trends of television services and others of added value which are currently commercialised with the others via broadband networks.

Key words: Television, media, consumer behaviour, commercail distribution, strategy, strategic analysis.

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1. Introduction The television industry has undergone considerable changes in view of new technological and legal conditions that have arisen throughout the decade of the nineties. Digital technology has made it possible to design a much broader television service thanks to the techniques of image com- pression and the transport capacity of the new broadband networks. On the other hand, the liberalisation of the telecommunications sector in Europe has created new opportunities in the television industry. Although this liberalisation has been slower than that of other services, and even limited, the monopolistic system in force in the majority of European countries has been eliminated and broadcasting by distribution systems such as satellite, cable, digital terrestrial television or ADSL has been regulated. The television service has increased considerably in the new digital environment. In Spain there is currently a supply distributed via the different signal transport networks. In addition to the traditional analogue service, we now have digital television by satellite, digital terrestrial television and cable television. The limited nature of the advertising market, new operators’ need to differentiate the service and segmentation and supply trends have facilitated commercialisation of the television service using different formulas that condition access to consumption. In this way an emerging pay television market has arisen. This study analyses the characteristics of the pay television service in Spain and the main determining factors in the immediate future. Therefore, in the first part there is a description of the main market agents of pay television in Spain, the commercial formulas they use and the contents they distribute. In the second there are details of what future market trends may be. In this regard, we have considered the possible development of the business map and consumption trends of television and value added services that are currently commercialised together with the television service via broadband networks1.

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2. The Pay Televisión Market

2.1. Open Television and Pay Television In Spain the provision of the public television service was regulated in 1988 via public limited companies with private capital. Since that date, the open and pay television service has multiplied. The phenomenon has furt- her increased with the emergence of digital satellite television, digital terrestrial television and cable television, leading to a transformation in the audiovisual sector in the nineties, whose main consequence was the increase in supply and competition. This development has led to changes in the financing of television2, which enables operators to be differentiated depending on the sources of financing they use. In this way, we can distinguish between two large groups: those that broadcast open television, whose financing comes from the sale of advertising slots, and the operators of pay television, whose financing comes from the payments made by its subscribers (CMT; 1999, p. 70). At the moment, the television service in Spain is formed by: – Open television service. In our country there is public and private television offering open audiovisual signals. Radio Televisión Española (RTVE) manages the two national broadcast channels that are publicly owned. On the other hand, there is a public television service that covers certain autonomous regions3. Private television was established pursuant to Law 10/1988 dated 3 May and it has enabled the indirect management of the public television service by public limited companies with private capital by means of adminis- trative concessions. In this respect, Antena 3 Televisión and Getevisión Telecinco manage two national television channels. – Pay television service. Canal Plus was the first television operator supplying a service subject to payment of a subscription. This operator used analogue technology. In addition to this analogue service is the one supplied via the digital plat-

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forms Vía Digital and Canal Satélite Digital. In the last three years digital terrestrial television (DTT) and cable operators have been emerging at different rates. There is only one DTT operator, Quiero TV, connected with the AUNA group. Furthermore, there is a series of cable operators opera- ting in the different demarcations created as a result of Law 42/1995 of Cable Telecommunications. These operators are mostly connected with the global operator AUNA and with the Cableuropa group (Ventura, R.; 2001). The transport capacity of these media leads one to assume that the number of programmes available has increased considerably. In Spain, since 1993, after a period of economic recession, advertising investment has increased steadily, with an accumulated growth of 15.9% (Díaz Nosty; 1998, p.303). Nevertheless, if we limit the analysis to the audiovisual industry, the growth figures are more modest in recent years4. Furthermore, the multiplication of media resulting from the liberalisation of the telecommunications sector makes it increasing difficult to cap- ture advertising revenue5. This circumstance lessens the attractiveness of advertising for the types of television that may condition access to their programmes6. Therefore, the possibilities offered by the distribution of cable, satellite or digital terrestrial television have encouraged the emergence of different commercial formulas associated with the sale of the television service. There have even been other factors that have promoted new access types, such as the extent of the programme supply and the increasing diversification of tastes and preferences among consumers.

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Illustration 1. The Pay Television Market

Functions

Multichannel television

Customers Digital satellite television Digital terrestrial television

Cable networks

Alternative technologies

Source: Own.

In this way a pay television market7 has been formed, which would be represented three dimensionally (Illustration 1): service (access conditioned to television contents), customers (a wide range of users making multichannel programming possible) and technologies (cable, satellite or terrestrial). On the other hand, the use of subscription to finance television is increasing among European operators8. The ratio between income from advertising and the fees paid by the subscribers is very favourable to the second method of financing in the case of digital television (Table 1). However, the ratio between advertising income and payment charges is expected to be reversed as a result of stopping analogue broadcasting, which is expec-

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ted to finish in the first decade of the 21st century. In this way, income from paying for the service may account for 71% of the income of operators in 20099.

Table 1. Income sources in the Television Market (Millions of Euros)

1994 1995 1996 1997 1998 1999 Analogue Television Advertising 1276 1329 1382 1478 1686 2075 Subscription 243 314 385 393 421 447 Digital Television Advertising 0 0 0 9 19 24 Subscription 0 0 0 89 331 430 Television Market Advertising 1276 1329 1382 1478 1705 2100 Subscription 243 314 385 482 753 877

Source: IDATE (2000).

In Spain, data on the sources of income of operators indicates the importance that pay television is acquiring. Indeed, income from subscribers’ payments have made up 26.3% of the total income in the television market in 2000. This figure was only 19% in 1999. Similarly, the percentage of income from advertising has decreased from a rate of 59% to 51.7% (Illustration 2).

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Illustration 2. Distribution of income in the audiovisual sector

0,3 100% 7

80% 51,7

60% 59 Other Advertising Pay TV charges 40% Grants 26,3 19 20% 21,7 15 0% 1999 2000

Source: CMT (2001).

The number of subscribers to pay television services was 2.9 million people in 2000, a figure that represented growth of 29% with regard to the previous year, in which an increase in comparison with the previous year had been recorded of 18.5%. Subscribers are distributed among Canal Satélite Digital (35.25%), Canal Plus (29.68%), Vía Digital (21.22%), cable operators (10%) and Quiero TV (3.8%). On the other hand, pay television turnover is increasing at a higher rate than the number of subscribers. In 2000, operators had a turnover of 1,122 million euros, 19.1% more than in 1999. From comparing this date we can deduce a change in consumers’ behaviour, becoming more willing to pay for their television service (CMT; 2001, pp. 95-163).

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2.2. Pay Television Service: commercialisation formulas and contents A user’s willingness to pay for the television service is in line with qualitative and quantitative criteria. Both types of criteria make it possible to pro- duce different commercialisation formula of television services. Roca (1995; p. 147) differentiates four10:

– Basic channels. The user subscribes to a broad package of channels that meets a varied range of his requirements. These channels are supplied in their basic version. This method is valid for cable, satellite or terrestrial television. – Pay channels. The customer subscribes to one or several channels not included in the basic service. – Pay per session or pay per view (PPV). The consumer chooses to see a programme that is broadcast coded at a fixed time, paying only for what he sees. – Near Video On Demand (NVOD) and Video On Demand (VOD). In the first case the user can decide which programme he wants to see, after paying a charge. The programmer repeats the broadcast of the programme at certain intervals, so the user joins the beginning of the broadcast immediately after his request. In the case of VOD the level of interactivity is greater than in the case of NVOD. In VOD the user decides when he wants to see a specific programme. In addition, the service offers all the functionalities of a video player. Bearing in mind the large number of subscribers that a cable network may have, this service would need a great investment in contents. This method requires sophisticated technology and it is basically designed for cable television.

In Spain, Canal Plus commercialises its contents in only one analogue channel. Accessing it requires the installation of a decoder. Later, the satellite digital television platforms Canal Satélite Digital and Vía Digital designed their services on the basis of basic channel packages,

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payment channels and pay per view. This formula is also used by cable operators. The DTT operator Quiero TV, as a result of technical and legal limitations, offers a basic service of 14 channels and pay per view services. It is foreseeable that the pay television service will shortly incorporate VOD on the basis of experiences in other European countries. The forecasts made by Kagan World Media (2000) show a considerable increase in the rate of penetration of VOD in European homes (Table 2).

Table 2. Forecasts on the penetration of VOD (%)

Countries 2000 2001 2002 2003 2004 2005 2006 Denmark 0.0 2.1 5.4 21.5 45.0 57.2 67.3 Germany 1.2 4.5 13.6 26.0 35.8 44.2 52.3 Ireland 0.0 5.4 24.2 42.8 62.3 67.0 69.2 Poland 0.0 0.1 0.9 8.9 23.2 29.2 35.1 Portugal 0.0 4.4 8.5 15.5 26.9 36.7 43.8 UK 3.0 7.5 16.7 24.2 30.9 36.6 42.4

Source: Kagan World Media.

The different payment methods in television promote a consumer’s rational choice in accordance with his preferences and tastes. Therefore, quality, and not quantity, of the audiovisual contents has to be the main variable to take into account to define a digital television operator’s service, besides determining the use of different payment formulas that discri- minate access to the service. In this respect, it is important to analyse the audiovisual content market. Independently of the media possibilities, there are content requirements to be transported via the new communication media. The increase in the television offer in our country results in pressure by demand on the content industry. As far as the contents industry is concerned, it is in an

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adaptation process, and momentarily there is a shortage of them and consequently an increase in prices. In principle, it is possible to differentiate the interests that open and payment television have as far as contents are concerned. Open television bases all its financing on advertising. For that reason, it is interested in general TV contents and those that are capable of providing very high audience shares. Pay television contents justify viewers’ financial payment. The audience share is not as significant as the number of subscribers interested in paying to receive the service. In this respect, the specialisation of the television service is an alternative to the general contents of open television. Specialisation can be defined according to different socio-demographic and geographic variables. On the one hand, there are local programming services aimed at a very specific audience from a geographical point of view. On the other, services centred on profiles of very specific consumers, theme channels, need a very broad geographical coverage to reach the thresholds of profitability. Broadband networks are an ideal medium for transporting theme and local channels, since the cost of distribution of a new channel is very low. Nevertheless, the differentiation of contents according to broadcasting methods is not absolute, since, in the short term at least, general TV contents will be present in the entire television service. The composition of general and specific contents defines the type of television and its cost. The contents can also be classified according to the price contracting them involves for the broadcaster. The price fundamentally depends on two variables: the degree of replaceability of the contents and the importance of the broadcast time. – Contents for which broadcasters are prepared to pay very high prices, whose degree of replaceability is very limited and where the broadcast time is an essential factor. This includes certain sport broadcasts or premiere showings of films. – Contents for which broadcasters are prepared to pay a certain price, which from the point of view of the customer are relatively

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replaceable and the time when they are broadcast is not crucial. In this group we could include the films of certain American production companies, television series, news channels, etc. – Contents for which broadcasters are hardly prepared to pay, whose level of replaceability is very high and where the broadcast time is not a key factor. The contents included in the first two groups are going to differentiate the pay television service and the different commercial services of the television service that operators use in Spain. High value contents are supplied with the pay per view formula and worth mentioning among them are sport broadcasts and films11. In a very competitive framework the dominant position is derived from the broadcast of these contents. Nevertheless, the increase in the prices of contents has promoted cooperation relations to acquire them. In this way, the current situation is not much differentiation compared with this service among the different pay television operators12. Every operator offers his subscribers a pay per view service to access the broadcast of football matches, film premieres, etc.13 Besides high value contents, operators offer a series of pay channels optional to the basic service. They are average value contents and the broadcast time is not decisive, and they meet the tastes of specific consumer profiles. The pay channels service is formed by: – Theme film channels: Canal Cine Palomitas, Adult Channel, Canal 18, Canal Cine 600, Canal Clásico, Cine Classics, Cine Palomitas, Cinemanía, Cinemateca, Disney Channel, Playboy, Showtime Extreme. – Football channels: Canal Barca, Canal Real Madrid, Canal Fútbol Total. – Professional and leisure channels: Canal Campero, Canal Cocina, Medicina, Canal Seassons. Added to this service are pay channels that appear associated with a successful programme in the programming of general channels and some

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autonomous region or local channels. Nevertheless, the latter are commercialised normally in the basic service. The basic service is formed by channels that can be classified into the following categories: film, sport, music, documentaries, child and teenage programming, news programmes, international channels, leisure and national, autonomous region and local general channels. These contents are supplied by all the platforms (Table 3).

Table 3. Basic service of the main Pay television operators

Vía Digital Canal Satélite Auna Cable14 ONO Quiero TV Digital Sport Eurosport, Eurosport, Eurosport, Sportmanía Eurosport, Teledeporte Teledeporte Sportmanía Sportmanía Music Canal Clásico, 40TV, MTV, 40TV, Canal Fiesta, Canal Solo 40 TV, MTV, E-music Canal Ritmoson, VH1 Tango, Planeta Música, Sol Music Choice, MTV, Sol Música, Música, VH1 Musicam and VH1 Música Film/Series Canal Alucine, Calle 13, Canal Calle 13, Canal AXN, Cinematek*, Calle 13, Calle 13, Cine Cine Paraiso, AXN, FOX, Cine Palomitas*, FOX, Hallmark, Cinematek*, Palomitas Canal Nostalgia, Paramount Hollywood, Paramount Comedy, Cine Palomitas*, Cinamateka, Cine Palomitas, Comedy, TCM Showtime Extreme*, TCM FOX, Estudio Gran Vía*, Hollywood, Universal, Cinematek*, Paramount Factoría de Factoría de Comedy, Ficción, Gran Ficción, Showtime Via, Paramount Hollywood, Extreme, TCM Comedy, TCM, Hallmark, Showtime Showtime Extreme Extreme* Leisure Canal Ella, Canal Viajar, Canal Vivir, Viajar, Canal Ella, Canal Viajar, Canal Hilo, Canal Punto Arte/People, Hilo, Canal Punto de Venta, Cocina, Estilo de Venta, Canal Moda, Fashion Canal Arte/People, Canal Cocina, Moda Cocina, Cultura, Canal Salud, Cosmopolitan, Estilo Canal Campero, Moda, Fashion TV, Vacaciones TV Cosmopolitan Child Buzz, Locomotion, Canal Muzzik*, Buzz, Cartoon Network, Club Canal Muzzik, Buzz, Cartoon Teenage Panda, Megatrix, Cartoon Super3, FOX Kids, Locomotion, Cartoon Network, Club Club Super3 Network, FOX Nickelodeon Newtwork, Super3, Planeta Kids, Nickelodeon, Junior Nickelodeon Panda

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Vía Digital Canal Satélite Auna Cable14 ONO Quiero TV Digital Documentaires Canal Discovery, Canal Historia, Discovery, Canal Historia, Beca, Hispavisión, Documanía, Documanía, Natura, Odisea Discovery, Geoplaneta Natura, Odisea Documanía, Odisea News BBC World, Bloomberg, BBC World, Bloomberg, CNN CNN programmes Bloomberg, Canal CNBC, International, CNN Plus, International, Expansión CNN Plus, Euronews, Expansión Financiera, Euronews, Financiera Euronews, Meteo Expansión Meteo* Financiera International BBC Prime, DW Germany, DW Germany, Galavisión, RAI 1, Galavisión RAI 1, RTV RTV Portugal, TV5 France Portugal, TV5 France General Antena 3, Canal Plus TVE1, La Dos, Antena 3, TVE1, La Dos, Telecinco Telecinco Antena 3, Telecinco Autonomous Andalucía TV, Andalucía TV, Andalucía TV, Antena Aragón, Andalucía TV, Local ETB, Telemadrid, Canal Canarias, Barcelona TV, Canal 33, Canal Canal 2 TVC, TV de Canal Sur TV, 44, Canal Canarias, Canal DGA, Andalucía, Galicia ETB, TVC Canal Municipal, Canal Sur TV, Canal 33, Telemadrid, TV3, TV de Galicia, Canal 9, Canal ETB, Zaragoza TV Sur TV, Punt Dos, Telemadrid TV

* They are channels supplied as pay channels. Source: Operators’ webpages. Own production.

3. Market trends in Pay Television In the European context, Spain has been distinguished as being a country that has quickly adopted a favourable behaviour towards the consumption of pay television. The percentage of homes with digital television in 2000 reached the figure 15.5% (Table 4), a percentage that was only exce- eded by the United Kingdom15. Similarly, the number of digital pay television subscribers is likely to increase to the figure of 5.4 million homes in 2005.

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Table 4. Digital Television in Europe

Number of suscribers to digital pay Percentage of homes with television (in millions) digital television 2000 2001 2002 2003 2004 2005 2000 Austria 0.13 0.2 0.3 0.4 0.51 0.63 4.1 Belgium 0.22 0.4 0.57 0.75 0.94 1.12 5.5 Denmark 0.23 0.34 0.46 0.58 0.7 0.81 9.5 Finland 0.08 0.15 0.23 0.32 0.42 0.53 3.3 France 3.24 4.04 4.91 5.85 6.81 7.87 14.4 Germany 2.53 3.68 4.93 6.25 7.59 8.92 8.2 Greece 0.04 0.08 0.13 0.19 0.27 0.36 1 Ireland 0.1 0.15 0.2 0.25 0.32 0.38 8.5 Italy 2.1 2.31 2.66 3.05 3.51 4.04 10.3 Luxembourg 0.01 0.01 0.02 0.03 0.03 0.04 4.3 Holland 0.37 0.66 0.96 1.26 1.56 1.83 5.8 Portugal 0.13 0.21 0.3 0.42 0.55 0.69 3.2 Spain 1.82 2.26 2.87 3.6 4.42 5.24 15.5 Switzerland 0.24 0.38 0.52 0.66 0.85 1 6 United Kingdom 6.53 8.42 10.02 11.08 12.38 13.56 27.4 EU 15 17.8 23.2 29.07 34.7 40.84 47.03

Source: IDATE (2001)a.

The influence the digitisation of television has on the financing model, mentioned in the previous heading, makes strong growth of pay television likely in our country. The development of this market will be conditioned to a large extent by the development of the different distribution networks, the business structure of the sector and consumer behaviour.

A) Distribution Networks: Cable, Satellite and DTT The conditions in which the different distribution systems of digitised television signals are going to be developed were designed in Spain at the end of the nineties: cable, satellite and digital terrestrial. Solving how the national audiovisual market is going to be divided among the three above- mentioned distribution systems has been the lot of the beginning of the

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21st century, since at the moment there is great uncertainty and enormous difficulties to ensure the supremacy of one of them16. Fibre optic is a communication channel that has characteristics that differentiate it positively from the rest of broadband communication systems. In the first place, the bandwidth is superior and therefore the transport capacity is greater, since it has almost unlimited possibilities with regard to the transport of television channels. In second place, the broadcast quality is superior and it is not subject to possible interferences. Thirdly, the return channel allows for the provision of services with maximum interactivity. Lastly, fibre optic uses physical media, whose availabi- lity is absolute, while satellite uses the radio electric space whose availabi- lity is limited and becoming more and more reduced. In spite of the technological supremacy of cable, there are obstacles that can halt its development. Due to their importance, the following are worth mentioning: the inadequate equipping of people’s homes and the high cost of infrastructures, the prior development of satellite television services, the uncertainty that affects regulations17 or the pioneering nature of our judicial framework with regard to the regulation of ADSL or digital terrestrial television18. Contrary to what has happened in the majority of European countries, satellite television developed prior to cable television in Spain. This situation has granted advantages in contracting contents to a system whose cost of implementation is considerably less. On the other hand, although the technological advantages of cable over satellite are considerable, we have to realise that solutions are being looked for that will enable bi-direc- tional communication via satellite. This possible situation would elimina- te one of the main competitive advantages of cable over satellite. At the moment, a trend contrary to the one occurring in Europe is being observed. If we look at the data in Table 5 and Illustration 3, we can see that the least widespread technology in both scenarios is going to gain market share on the dominant technology. In this respect, in the European area, a standardisation of the use of the different technologies is likely, where satellite, cable and DTT are going to have significant market shares.

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Table 5. Pay Television suscribers according to distribution systems in Europe (Millions of homes)

Cable subscribers 45.3 46.1 46.1 48.0 4.7 14.6 27.7 48 Satellite 11.2 13.3 15.8 22.6 7.8 11.1 14.9 22.6 DTT 5.1 5.8 7.1 10.2 0.6 1.0 1.8 8.8 Total pay TV 61.5 65.3 68.9 80.9 suscribers

Source: IDATE (2001)b.

Illustration 3. Percentage distribution of the number of suscribers to pay television in Spain

100%

33.4 80% 35.9

60% 4.9 9.7

40% 59.2 56.5 20%

0% 1999 2000

Satellite Cable Hertzian

Source: CMT (2001).

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B) Business Structure of the Sector The digital technological environment has encouraged the formation and competitiveness of multimedia groups. The convergence of networks encouraged by the use of digital technology makes the distribution of contents on different media possible, This fact has laid the foundations for the generation of economies of scope and justifies that specialised communication groups (television, press or radio) will very probably have to join multimedia groups to be competitive. Telecommunications operators have also taken part in this process. These companies have the infrastructures and distribution systems required to supply broadband services. In Spain there are three large multimedia groups related to the pay television market: Telefónica, Auna and Sogecable. The first has a significant presence in analogue television operators (Antena 3), digital satellite television (Vía Digital) and the possibility of acting in each one of the cable demarcations (Telefónica Cable)19. The Auna group, via Auna Cable, offers cable television in Madrid, Catalonia, Canary Islands, Aragon and the majority of Andalusia. It is also the main shareholder of the company Onda Digital, the concessionaire of the of digital terrestrial television and which commercialises the service of Quiero TV. Lastly, Sogecable is the owner of 83.25% of Canal Satélite Digital and of 100% of Canal Plus. These two companies have 77.7% of the pay television turnover in Spain (CMT, 2001; p.156). These companies generate a pay television service that means that the majority of the country has access to two satellite platforms, one DTT platform and a cable operator. The duopolistic structure existing in satellite television and cable television is noteworthy. In the first case there is natural duopoly and in the second case it is established by the judicial framework. Canal Satélite Digital and Vía Digital currently compete for the digital satellite television business, after the first three years of activity have gone by without fulfilling the expectations forecast in 1997 on the number of subscribers (Castejón, Feijó, Juanes and Pérez, 1997; CMT, 1999).

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In the case of cable television, the Cable Telecommunications Law pas- sed in 1995 designed a territorial and duopolistic structure for the sector. The country was divided into 43 demarcations20. The characteristics of the demarcations condition the feasibility of the two operators in a climate of concentrating the sector towards a monopolistic structure. The fragmen- tation of the Spanish territory also prevents the possibility of cable operators obtaining economies of scale21. If we take the current division of the market into account, the stages in a liberalisation process described by Eakin and Faruqui (2000) are likely to develop. According to these authors, we can notice three phases that an industry goes through after deregulation. The first, the participation of many new agents and an oversupply of the service that involves strategies based on the price, whose objective is the capturing of new users. In the second phase, the number of agents decreases as a result of the supply being in line with demand, some of the companies that started their activity disappear and there are horizontal integration phenomena under the premise that there is not enough market to be shared. In a third, with a consolidated business map, the companies’ strategies are aimed at differentiation in the market and there is no price war. In accordance with the forecasts made (Castejón, Feijó, Juanes and Pérez, 1997; CMT, 1999) and commercial strategy based on prices that the different platforms have developed, we deduce that the market situation is characterised by oversupply and it is in a position to enter into the second phase of horizontal concentration. On the other hand, in contrast to the decreased dimension of the markets, there are trends in consumption that would enable the increase in the available market to be deduced. In the first place, a decrease in the general television audience in the future would make a shift of consumption towards cable and satellite service possible. In spite of this, a drastic decrease in consumption of open television is not probable, at least in the short term. In the second place, there is still a part of the television market covered by former community cable or video operators. Growth strategies that

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the main television operators follow are aimed at taking over or merging with local operators. This will be the situation in those cases in which the customer base or the infrastructure quality are attractive. Otherwise, the former operators may simply change to being distributors of the new operators or they will disappear.

C) Consumer behaviour Despite the multiplication of the television service and the increasing transport capacity of the distribution systems, there is a maximum television consumption time that TV viewers do not wish to go over22. In Spain, television consumption is in a state of stagnation or saturation (Díaz Nosty; 2000, p. 211). The Comisión del Mercado de las Telecomunicaciones (CMT – Telecommunications Market Commission) (2001, p. 165) estimates that the average television consumption per per- son per day in our country is 210 minutes. This figure is similar to the one recorded in 1997 (209 minutes), the year when the increase in the television service started. Consumption recorded in 2000 is even less than in 1996 (214 minutes). As a result, the contents of the television service of television operators must be centred on meeting consumers’ demands, both in quantity and quality, also considering that the amount of television channels that meets consumers’ demand is not more than fifteen channels and a service that is too broad can demotivate the TV viewer that has to choose which programme he wants to watch23. Nevertheless, markets will develop towards more segmentation and differentiation of consumer profiles. Due to the wide range of consumer types, television service must include more channels to cover different market segments. In short, the number of channels available should be very high, but the services offered to consumers should have fewer channels. As far as the quality and attraction of the contents are concerned, this depends to a large extent on high value contents. With reference to differentiating contents of the different audiovisual services, sport will be the

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most important. The production of different programme packages and the possibility of paying differently by channels and events is a formula that will be used to adapt contents to the demands of the different market segments. The financing of television by means of pay per view is likely to see a strong growth. Even so, we cannot rule out the financing capacity of advertising, although it has to adapt its forms to the new television. Nevertheless, high value contents are currently present in all the services commercialised. This circumstance means that they are not capacble of differentiating companies in the market. This situation has been reached for two reasons. Firstly, due to the defence actions of the competition, both nationally and in the European community, which have forced pro- perty rights over certain contents to be shared. Secondly, the pressure of demand on these contents has generated a rise in prices and therefore the need by the operators to share the investment that this acquisition involves. In this respect, companies find differentiation in average value contents and new interactive television services. The multiplication of the television service has led to a very importance rise in the contents industry that will meet the demand of the new media. In addition to the market opportunity that has arisen, there is a political willingness to support the contents industry. The European Commission considers that it is important to protect and defend the cultural identity of European countries24. For companies supplying television services, the standards are an obligation as far as the contents they supply are concerned. In addition to the competition to supply the best contents from the USA, there is also a need to supply top quality European contents. In this market, entrance barriers are much more accessible and there is not such a noticeable share of exclusive rights as in the case of broadcasts of sport or American films. In this context, television companies in our country can opt to acquire contents from independent production companies or to finance the productions themselves25. The use of this financing facilitates financial suffi- ciency for Spanish production companies and at the same time ensures ave-

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rage value contents for television channels. In this kind of market, new operators have a wide range of options, since there are production companies independent of the already established television companies26. This makes participation in Spanish film and series production possible, providing new television services with quality27. On the other hand, removing the obliga- tions of open broadcasting, which affect some high value contents, could open up new markets and, consequently, encourage a decrease in prices. This situation would not only extend the supply of contents, but it would also open up an important source of revenue for pay television. With regard to the new interactive services, the likely future environment for television operators is a strong development, based on consumption in homes. People’s homes are therefore considered as the great centre of future consumption and purchase. As a result, the supply of products and services will have to access the home. This situation is ideal for the implementation of interactive services via broadband networks. Nevertheless, there are two possible obstacles. Firstly, the increase in consumption from home may be more significant at the end of the first decade in the 21st century. Secondly, Spanish culture and the habits of the population encourage consumption outside of the home. The new interactive services respond to the phenomenon of convergence between Internet and television products. In this regard, the production of interactive television services or Internet portals with more television contents are proliferating (VECAI, 2000). The first aspect is typical of operators using satellite or digital terrestrial television (Broadcaster). The second will be the formula used by ADSL or UMTS operators (narrowcaster). Vis-à-vis these operators, cable companies have a network that improves the possibilities of creating products that meet the conver- gent trend between television and Internet contents. The convergence of services in Spain will be conditioned by the relation of users with the terminals. Although a very high level of penetration of digital television was observed in Spain in the illustration, these figures are inverse to the Internet penetration rate in Spanish homes and the percenta-

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ge of homes with a personal computer. According to the European Commission (2000), the percentage of homes with a personal computer in our country is below that of the European average, and there are only fewer homes connected to the Internet in Greece and Portugal (Illustration 4).

Illustration 4. PC and Internet penetration rate in european homes

0 UK Italy Spain France Greece Ireland Austria Finland Belgium Holland Portugal Germany Denmark Switzerland Luxembourg

PC Internet

Source: European Commission (2000).

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The scenario described is favourable for television operators to take on an important role in the supply of interactive services in Spanish homes. In this respect, broadband networks offering pay television services have a capacity to supply global telecommunications services, with fibre optic offering the largest interactive capacity. Nevertheless, satellite is under- going technological improvements that make it possible to offer interactive services with satellite television. Furthermore, digital terrestrial television was the first to offer the Internet access service via the TV set. Therefore, the economic feasibility of digital television operators will not depend exclusively on television supply, although it is very possible that it will be an attraction for the sale of the other services. In Spain, digital satellite and terrestrial television operators are already commercialising a wide range of additional services to the multichannel television supply (Table 6). In the case of cable, the television supply is complemented by the possibility of offering Internet and telephony. Nevertheless, in the case of cable, high speed Internet access has to be through a personal computer.

Table 6. Interactive services supplied by Pay Television Platforms

Interactive Services Vía Digital Canal Satélite Digital Quiero TV Telebanking * * Electronic Commerce * * SMS * Stock Market Info * * Weather * * E-mail * Internet Access * * * Traffic Information * Games * * Interactive Advertising * * Entertainment Guide * * * Football Results * * Other Sports * Wireless Keyboard *

Source: CMT (2000).

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Illustration 5. Impact of Internet on the comsuption of other services

Source: European Commission (2000).

The possibility of supplying Internet together with television services will be more important if a shift in consumption from television to the use of the Net is confirmed. According to the European Commission (2000) the impact of Internet on the rest of the leisure activities is greater in the case of television. Therefore, 73% of the people using Internet consider that this consumption time affects the time they spend watching television (Illustration 5). In this respect, the additional service of television operators decreases the negative impact of the distribution of consumers’ time in view of the new digital offer.

4. Conclusions The liberalisation of the telecommunications sector and the new technological possibilities have led to an increase in the television service in Spain.

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One of the consequences has been the change in the operators’ financing models. The multiplication of media makes it increasing difficult to captu- re advertising revenues. For that reason the use of commercial formulas that involve paying for television consumption is on the increase. The digitisation of television will emphasise the use of this type of financing in future yeas and therefore there will be growth in the pay television market. In our country, there is a pay television service formed by analogue operators, digital satellite television, digital terrestrial television and cable operators. Companies are connected on the whole to the business groups Telefónica, AUNA and Sogecable. The first has a significant presence in analogue television operators (Antena 3) and digital satellite television (Vía Digital). AUNA telecommunications group is present in cable (Auna Cable) and the concessionaire company of digital terrestrial television (Quiero TV). Lastly, Sogecable is the main shareholder of the companies Canal Plus and Canal Satélite Digital. At the moment, the supply of operators is formed by packages of basic channels, premium channels and pay per view. It also includes contents that can be classified into high value, average value and low value contents. The main characteristic of the high value contents is that the broadcast date conditions its value on the market. Average value contents are relatively replaceable and the time is not a crucial variable. Lastly, low value contents are replaceable in the programming. Operators’ basic service includes low and average value channels with contents of film, leisure, news, sport, music, child and teenage programming, documentaries, international, general autonomous region and local channels. Premium channels are average to high value as they are formed by theme film and football channels on the whole, but they are not depen- dent on the broadcast time. Lastly, the pay per view formula is used for high value contents when the broadcast time is a fundamental characteristic, such as football and film premieres. The consumer’s decision to pay for the television service depends on qualitative and quantitative factors. High and average value contents jus-

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tify paying for television consumption. However, at the moment there is not enough of these contents in view of the explosion in the demand by new operators. In the future, an increase in the production of contents is likely. Lastly, cooperation agreements in the acquisition of higher value contents is a strategic alternative that will be used in view of the increase in the prices of high value contents. The number of channels that meet the needs of the consumer is not more than fifteen. However, the segmentation of the market requires operators to be able to offer a very high number of channels or programmes. The interactive nature of broadband networks means that a global telecommunications service can be offered. Therefore, the operators’ economic feasibility will not depend exclusively on the television service. Nevertheless, this is probably going to be the main commercial argument that enables the sale of contents less well-known for the user. Fibre optic is the network that is best equipped to create a global supply of telecommunications services, which includes television, Internet access, telephony and interactive services. In spite of this, the competitive difference based on technological characteristics can be eliminated in a future scenario in which the rest of the distribution systems acquire the capacity to offer interactive services.

References ABELL, A.A. (1980): “Defining the business”. Prentice-Hall. Englewood Cliffs. ABELL, D. F. and HAMMOND, J. J.: (1989): “Planeación estratégica de mercado. Problemas y enfoques analíticos”. Compañía Editorial Continental, S.A. de C.V. México. D.F. ARIÑO, G., AGUILERA, L. and DE LA CUÉTARA, J.M. (1996): “Las telecomunicaciones por cable. Su regulación presente y futura”. Marcial Pons. Ediciones Jurídicas y Sociales. Madrid. ARRIOLA, J.M. (1995): “La industria de los servicios multimedia”. Economía Industrial, nº 303, pp. 47-51.

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CASTEJÓN, L., FEIJÓ, C., JUANES, R. and PÉREZ, J. (1997): “La regu- lación y el mercado de la televisión digital por satélite”. Recogido en http://www.gtic.ssr.upm.es/artihtm/artregul.html. CEBRIÁN, J.L. (1996): “Los retos de la convergencia del hipersector de las telecomunicaciones con el mundo audiovisual”. En Terceiro, J.B. (Ed.): “El Futuro Actual. Primeras Jornadas sobre la Sociedad Digital”. Fundación Caixa Galicia. COMISIÓN DEL MERCADO DE LAS TELECOMUNICACIONES (1999): “Informe Anual 1998”. Madrid. – (2000): “Informe Anual 1999”. Madrid. – (2001): “Informe Anual 2000”. Madrid. EUROPEAN COMMISSION (2000): “Measuring Information Society. 2000”. www.europa.eu.int DÍAZ NOSTY, B. (1998): “Informe Anual de la Comunicación 1997- 1998.”. Grupo Zeta. Madrid. – (2000): “Informe Anual de la Comunicación 1999-2000.”. Grupo Zeta. Madrid. EAKIN, K. and FARUQUI, A. (2000): “Bundling Value-Added and Commodity Services in Retail Electricity Markets”. The Electricity Journal, December 2000. IDATE (2000): “Development of Digital TV in Europe. Spain/2000”. www.idate.fr – (2001): “Development of Digital Television in the European Union. 2000”. www.idate.fr – (2001): “Digiworld 2000”. www.idate.fr LUC, J. (1994): “El futuro de la televisión por cable”. Telos, 36, pp. 13-36. NAVAS, J.E. and GUERRAS, L.A. (1996): “La Dirección Estratégica de la Empresa. Teoría y Aplicaciones”. Editorial Civitas. Madrid. PASCALE, L. (1992): “L’offre et la réception de la télévision francophone en Belgique”. Réseaux, nº 44/45. Citado en: Luc, J. (1994): “El futuro de la televisión por cable”. Telos, 36, pp. 13-36.

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ROCA, J.M. (1995): “El sector audiovisual y el proceso de los multimedia”. Economía Industrial, 303, pp. 147-155. – (1996): “Las redes de televisión por cable”. Telos, 44, pp. 66-71. RODRÍGUEZ, J. (1995): “Los aspectos industriales de la Sociedad de la Información”. Economía Industrial, 303, pp. 19-20. RODRÍGUEZ, L. (1995): “La nueva era de las telecomunicaciones: com- petencia y desregulación en redes”. Información Comercial Española, 747. TERCEIRO, J.B. (1996): “Sociedad Digital”. Alianza Editorial. Madrid. – (Ed.): “El Futuro Actual. Primeras Jornadas sobre la Sociedad Digital”. Fundación Caixa Galicia. THE EUROPEAN INSTITUTE FOR THE MEDIA (1988): “Europe 2000. What kind of television?. The report of the European Television Task Force”. The European Cultural Foundation. VENTURA, R. (2001): “La Televisión por Cable en España. Tendencias y estrategias”. Ediciones Unviersitarias de Barcelona. Barcelona.

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NOTES:

(1) The market analysis is based on the results obtained from applying the Delphi technique and the collaboration of 53 experts in the telecommunications and social media sector (Ventura, R.; 2001). (2) We will not consider levies, a traditional manner of financing public television. (3) As a result of the coming into effect of Law 46/1983 dated 26 November, regulating the Third Television Channel, the following television channels were created: Telemadrid, Televisió de Catalunya (TV3 and Canal 33), Televisión de Galicia (Galicia TV), Televisión Valenciana (Canal 9 and Noticias 9), Euskaltelebista (ETB1 and ETB2), Canal Sur and Canal Andalucía. (4) Specifically, in 1999 there was a rise in advertising revenue obtained by private and public television, of 10% and 13.6% respectively, in comparison with the previous year (CMT; 2000, p. 140). On the other hand, in 2000, the above-mentioned annual increases were 13.3% and 4.5%, respectively (CMT; 2001, p. 161). (5) The competition for television operators with regard to capturing revenues for advertising services comes from: Different media. Television has been increasing its share of the advertising market in our country. In 1997 it took up 40.5% of advertising revenue in the key media, a figure that was 37.9% in 1990 (Díaz Nosty; 1998). Nevertheless, the increase in its advertising revenues has been obtained by decreasing prices for advertisers and a parallel rise in the amount of time set aside for advertising. Different channels. The proliferation of specialised channels that have enabled the broadband infrastructure makes it easier for advertisers to choose among a large number of possibilities. Similarly, advertising is more efficient in specialised media. Direct ways of marketing and promotional expenses of products. These commercial formulas have captured part of the advertising budgets due to a decrease in costs, encouraged by technological advances. (6) Nevertheless, the fact that pay television services are not very profitable in the first years justifies using additional sources of financing such as advertising. For example, Canal Plus obtained an approximate figure of 4,400 million pesetas in 1999, which meant an increase of 30% with regard to the previous year (CMT; 2000, p. 136- 200). (7) Market understood as the supply of functions covered by certain products to a certain group of customers, including all the replacement technologies that enable these functions to be provided (Navas and Guerras; 1996). (8) In the 1994-1999 period, the amount of income from the payment of a subscription multiplied by 3.6 while income from advertising grew 160%. (9) The estimate has been made by Kagan World Media and published in the February and July/August issues of Euromedia in 2000.

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(10) The Telecommunications Market Commission (2000, p. 131) records the same type of services according to the classification in which it differentiates: channel package in a minimum or basic supply, basic package with premium channels and audiovisual services using the pay per view technique. Within this last category it differentiates three types of services: NVOD (Near Video on Demand), events and IPPV (Impulse Pay per View). (11) Nine out of the ten most seen slots in 1998 were broadcasts of football matches (Díaz Nosty; 2000, p. 238). (12) Broadcast rights of football matches in the championship in Spain were owned by public, state and autonomous region television companies as well as pay television companies (Canal Plus, Canal Satélite Digital and Vía Digital) to 2000. The digital platforms reached a cooperation agreement in the joint acquisition and exploitation of the rights in view of the increase in prices that caused the dispute for these rights. However, the intervention of the European Commission has opened up access to football rights as a guarantee of the development of new television operators. In this way, cable and digital terrestrial television operators will be able to supply football matches in the Spanish championship by pay per view, at least until 2003. As far as films are concerned, digital platforms have established exclusive agreements on the contents of the main audiovisual content distributors in the first years of their activity. Cable operators have started their activity without exclusivity agreements of this nature. However, they have used two ways to obtain broadcast rights of their audiovisual contents. In the first place, negotiating with the platforms that own the rights. In the second place, pooling the negotiation capacity of the different cable operators. In this respect, the company Estreno Digital, owned by the operators of the Asociación de Operadores de Cable (AOC - Association of Cable Operators), was established in order to negotiate the purchase of these contents jointly. (13) The operator Vía Digital offers the “palco” service. Canal Satelite Digital has the product called “Television a la Carta”. The cable operators connected with Auna Cable offer “Mirador” so that their subscribers pay for films or football matches. ONO operators have a similar supply known by the trade name Fila ONO. Lastly, Quiero TV allows contracting events with its Quiero Club product. (14) Auna Cable commercialises the supplies of Supercable, Cabletelca, Menta, Madritel and Able. Not all the supplies coincide and the channels offered in at least one of the supplies commercialised by Auna Cable are shown. (15) The European Commission (2000) provides similar figures to the IDATE study with regard to the percentage of homes with digital television in Europe. (16) The Delphi study carried out on 53 experts states the impossibility of deducing a differential evaluation on any of the three distribution systems (Ventura, R.; 2001). (17) The European Union has promoted an updating process of the regulatory framework of the telecommunications sector which should end this year, with the adaptation of national legislations (Pérez, J.; Pérez, H. and Pérez, S.; 2000, p. 3).

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(18) In both cases, Spanish regulation has been one of the first in Europe. Besides, it has been published at a cri- tical time for the development of cable and with the moratoria period of Telefónica still in force. The early regulation of ADSL technology is especially worth noting. The new technology has not covered a significant demand because it has been met with scepticism by the majority of user associations, who consider that the rate is not aimed at residential users (CMT Report; 2000). Users’ doubts have been endorsed by market data, which has not reacted favourably to its introduction (seven hundred subscribers in 1999). “The implementation of ADSL technology and the flat rate for the Internet have created many expectations and unmet uncertainties” (p. 197). With the above-mentioned data, we could argue that the introduction of ADSL and the high speed Internet access supply has created more uncertainty than real competition in the Internet access market. Therefore, the damage for cable operators results in the level of doubts during the period of investment in cable. (19) The presence of Telefónica in the communication media is more extensive. In addition, the internationalisa- tion of their business has also led to important investments in the television industry in South America, especially in Argentina (Ventura R., 2001). (20) In spite of the fact that the Cable Telecommunications Law was repealed by the General Telecommunications Law, the demarcations established are still in force in the cable television business. (21) The possibility of being able to act in the entire Spanish territory and consequently enjoying economies of scale is highlighted by the company Telefónica itself. Among the reasons put forward by the telecommunications operator to justify the extremely low level of activity of Telefónica Cable it mentions the fact that the moratoria period is still in force in some demarcations. This fact stops the activity being started on a national scale and obtaining the advantages derived from a more extensive area (CMT; 2000, p. 156). (22) In fact, whether there are cable networks or not in a country does not have a fundamental impact on total television consumption or average listening time (Luc, J.; 1994, p. 21). In Belgium, the average consumption time did not develop significantly from 1973, the date when the expansion of cable television started, to 1991 (Pascale, L.; 1992). (23) As Cebrián states (1996, p. 382) “our capacity to choose is small, much smaller than the options technology offers us. And it is not certain whether we want to be constantly choosing”. (24) The different view Europe and the United States hold about the audiovisual sector is maintained. In Europe, the way in which the audiovisual sector has been dealt with has gone beyond guaranteeing the operation of the market and free competition of companies. The socialising effect of the sector and the impact it has on a population’s culture have been recognised. In the USA, the audiovisual policy has not been as interventional and free competition has been promoted in the sector.

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(25) In fact, in the transposition of the Television without Frontiers directive to the Spanish legal framework (BOE –Official Gazette of the Spanish State–, 08/06/99) the obligation to allocate 5% of commercial income from television channels to European film production was included. The effects are considerable, since the investment of television companies in film productions has gone from 3,330 million pesetas in 1997 to 13,375 million pesetas in 1999 (Díaz Nosty; 2000, p. 247). (26) In recent years, the success of Spanish series has made a decisive contribution to the consolidation of independent production companies. (27) Rafael Ventura Fernández

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