[kictanet] Death of a dream: Africa’s pay TV challenger GTV runs out of financial road

[alice]

(From Balancing Act)

Death of a dream: Africa’s pay TV challenger GTV runs out of financial road

Last Friday Gateway Broadcast Services (GTV’s operating company) 
announced today that its Board of Directors has unanimously approved a 
plan to liquidate the Company. Its statement blamed “excessive demands 
on the business” caused by the global financial crisis that “interrupted 
(its) ability to secure funding on an acceptable timescale and have left 
us no choice but to cease operations”. Russell Southwood looks at where 
it all went wrong.

To understand how GTV came to be launched, it’s necessary to go right 
back to the beginning and start with Gateway Communications. Ex-banker 
Julian McIntyre and his friend Ghanaian-Briton telecoms manager Peter 
Gbedemah launched the company over ten years ago and worked out of a 
modest set of offices near Warren Street in London. They were part of a 
very small group of people outside the continent who could see its 
potential and sought to provide international wholesale services to ISPs 
and carriers. Africa wasn’t one of its markets, it was its market.

Among other things, McIntyre bought a banker’s instinct for deal and the 
company thrived on a combination of organic growth and acquisition. Some 
acquisitions like the company that became its South African subsidiary 
were a shining success, whilst others like Datatel in Sierra Leone less 
so. There were ups and downs but the company continued to grow.

The turning point came in 2005 when mobile operator Celtel (now Zain) 
decided to sell a number of its non-core businesses prior to carrying 
out the IPO that led to its trade sale to MTC. In order to make the deal 
attractive, Celtel gave a long-term commitment to Gateway Communications 
as the buyer that it would use it as its wholesale carrier. In a single 
leap the company had gone from being an interesting challenger to being 
a significant player: it could now lay claim to around 20-25% of the 
market for international voice traffic and this would grow to 30% over 
three years.

With the acquisition of Link Africa, the company had an assured stream 
of business and a positive cash flow. It had become “bankable” on a much 
larger scale. Faced with this happy circumstance, the question then 
arose: what can we do next? A number of possibilities were investigated 
and a decision was taken to enter the Pay-TV market in Africa that was 
announced publicly in February 2007.

Pay-TV in Sub-Saharan Africa was dominated by two large players: 
Naspers-owned DStv/Multichoice in Anglophone territories and Vivendi’s 
Canal Plus in Francophone territories. Both had invested significantly 
in rights and were charging relatively high monthly rates for access to 
their services.

The strategy was two-pronged: firstly, to provide users with lower 
subscription rates (US$20-35 per month) and secondly, to acquire 
compelling content to drive that process. Rupert Murdoch has described 
sports rights as the “battering ram” of successful Pay-TV and Africa is 
no exception. So in May 2007 GTV announced that it had bought the UK 
Premiership rights for 40 Sub-Saharan African countries. These countries 
did not include Nigeria and South Africa that were considered 
sufficiently large to be sold separately. Although it would not discuss 
the cost, Nigeria’s Hi-TV spent US$28 million on getting them for 
Nigeria and GTV’s rights cost US$30 million.

Although the Premier League does give some “holiday” on full payment, 
this kind of gearing meant that GTV had to maximise its income as 
quickly as possible in order to show new investors some kind pattern of 
progress towards a cash-positive operation. So it was a sprint from the 
start as the company launched in 10 countries (East Africa followed by 
Southern Africa) and sought to establish itself as a continental brand.

This sprint for growth was backed by the Swedish group Kinnevik (more of 
which later) with a US$40 million investment and Citigroup, Noonday 
Global Management and Avenue Investment Management. McIntyre was 
supremely confident that GTV would kick down DStv/Multichoice’s front 
door, get more subscribers than it outside Nigeria and South Africa and 
move on to compete with Canal Plus in Francophone territories. The 
Premiership rights almost by themselves would be sufficiently persuasive 
to get subscribers to switch from the incumbent and that a deeper 
bouquet could be built as things progressed.

In the event, DStv/Multichoice after its initial shock and anger fought 
back with a range of tactics including a low-cost bouquet. But if 
competition was good for Pay-TV subscribers, it was less good for GTV’s 
sprint for growth: the short, sharp campaign which was to have ended in 
a victory declaration turned into something more like trench warfare.


The longer GTV was in a territory, the better it established itself and 
its impact on the market was that it took more of the new market growth 
than its competitor: for example in Uganda, it had 20,000 subscribers. 
However, the number of markets where it was making demonstrable progress 
was still relatively small in number. Nevertheless it continued to 
fundraise and look for ways of increasing its market share. Late in 2008 
it announced that it would enter Francophone markets to compete with 
Canal Plus. But by this time, the financial costs of running an 
operation that had not yet gone into profit were beginning to bear down 
on the company.

Its fundraising efforts were taking place in a financial climate that 
just got steadily worse. In order to stay upright, it made a decision to 
sell the “cash cow” Gateway Communications to Vodacom for US$700 
million. However, this was clearly a sign of desperation as things began 
to unravel. On the 7th of January 2009, Kinnevik announced that it had 
sold its stake $23.6 million, a return 1.8 times the amount invested in 
May 2007. How do you sell a stake in a loss-making company and make that 
rate of return?

(Kinnevik is owner of the MTG Group which runs Pay TV operations in 24 
European countries. On 7 January 2009 it launched Viasat 1, a new 
Free-To-Air channel in Ghana. It was also rumoured to have expressed 
interest in becoming a shareholder in new South African Pay TV player, 
OnDigital

Well reading between some of the fairly clear lines of the different 
players, the investment that GTV had obtained from different companies 
was underwritten by its ownership of the profitable Gateway 
Communications. Once that was sold, investors probably had agreements 
that allowed them to claim back their investment. A loss-making bank 
like Citigroup would doubtless also want to exit in order to retrieve 
whatever funding it could at this stage. Therefore the plan to sell to 
Canal Plus can be read as a last desperate throw of the dice before 
facing the inevitable.

Why did GTV fail? Not all of the blame can be laid at the door of the 
current financial crisis for there are other reasons:

* The “battering ram” of football rights alone was not enough to get 
DStv/Multichoice customers to peel off quickly enough. GTV started with 
12 channels and DStv/Multichoice had 70 video channels and 40 audio 
channels. Customers might want the Premiership matches but other family 
members still missed content on its competitor’s bouquets. Indeed, there 
was some resentment from customers in countries where GTV had not 
launched about their inability to get their favourite games.

* The sprint for growth strategy was not helped by the lead times needed 
to deliver set-top boxes. In the early stages, there was a shortage of 
boxes and it took three months for them to get from the manufacturer to 
the market. Supply problems of this kind were ironed out but there was a 
period when there was more demand than supply could meet.

* But these reasons pale into insignificance alongside the biggest 
reason of all. Wherever you are globally, Pay-TV is a deep pocket 
business. It should not be forgotten that making a success of BSKyB 
almost unseated Rupert Murdoch. The extremely expensive core rights that 
will make a success of the business have to be repurchased every three 
years and thus far they have only ever gone up in value.

So now that GTV is no more what will happen to the UK Premiership 
rights? DStv has secured the licence to show the Barclays Premier League 
Live Package A and will be showing these
matches on SuperSport from this weekend. SuperSport already held both 
Live Package A & B rights for South Africa and Live Package B rights for 
the rest of Sub-Saharan Africa and with
this deal has now secured all Premier League live rights for the 
remainder of the 2008/2009 season and for the whole of next season. The 
Nigerian rights are still held by Hi-TV.

So where does this leave competition in the Pay-TV market? In the 
short-term, competition is not in good shape. There are regional players 
like TV Cabo in the Lusophone markets and Hi-TV in Nigeria. The latter 
claims 195,000 “activations” with some smaller number actually as paying 
subscribers. Others like Orange and Wananchi are reliant upon 
sub-licensing deals from existing rights holders which will mean that 
the existing large players will have considerable influence. The shame 
is that GTV’s presence in the market energised individual markets and 
attracted investor interest in the broadcast sector. It is to be hoped 
that the pioneers get the arrows and later settlers will get some of the 
land. But sadly in the short-term, GTV’s passing can only undermine the 
slowly building credibility of Africa’s broadcast market.

CALL FOR PAPERS – 2nd AFRICAN BROADCAST, FILM AND CONVERGENCE CONFERENCE 
(23-25 NOVEMBER 2009), ABUJA

This is an early call for papers to be presented at the 2nd African 
Broadcast, Film and Convergence Conference taking place 23-25 November 
2009. If you wish to present a paper at this conference, please send a 
short outline of your proposed topic to Russell Southwood, Balancing Act 
who is responsible for putting the programme together: 
info at balancingact-africa.com