Make better business decisions. Romania TV update September 2012 Adrian Reynolds, Analyst 2

Make better business decisions

Romania TV update

September 2012

Adrian Reynolds, Analyst

2

Romania TV update, September 2012

1. Highlights

2. Pay-TV landscape

3. Next-generation TV

4. Viewing and programming

5. TV advertising

6. TV forecasts

7. Informa viewpoint

www.informatandm.com © Informa UK Limited 2012. All rights reserved

Highlights• Romania’s pay-TV market has peaked with 72% of TV households taking a service,

although there remains a substantial divide in uptake between urban and rural areas.

• The formerly dominant cable sector is in decline with a price war leaving many operators struggling financially. Many subscribers have not been convinced to upgrade to digital services, while others are simply not passed by cable networks.

• Consolidation has begun as operators look to acquisition for subscriber growth and this trend is set to accelerate, although UPC has denied claims it will sell its Romanian assets.

• RCS Romania continues to lead the pay-TV market, taking nearly half of total subscriptions, although it is struggling financially. The aggressive price war has made bundled services vital for increasing revenues.

• A three-year delay to ASO to 2015 has slowed progress in DTT with trials still taking place and full launch expected in 4Q12.

• Piracy remains a problem with cable systems retransmitting unauthorized satellite content and several websites illegally providing pay-TV programming.

• Informa expects consolidation to speed up as organic growth proves more difficult and profitability from TV services declines further.


TV overview


Year-end data (000s) 2006 2007 2008 2009 2010 2011e

Television households 7,902 7,966 8,021 8,078 8,134 8,191

Analog terrestrial 3,458 2,664 2,293 2,226 2,285 2,203

Analog satellite 6 5 5 4 2 1 Analog cable 3,770 3,475 3,290 3,091 2,923 2,661 Digital cable 17 65 200 319 397 909 IPTV 0 0 0 1 30 30 Pay digital satellite 613 1,699 2,153 2,333 2,383 2,263 Free digital satellite 38 57 80 104 114 124

Primary digital terrestrial 0 0 0 0 0 0

Source: Informa Telecoms & Media

• Some 72% of TV households take a pay-TV service, although this figure reaches up to 91% in urban areas. Pay-TV has little room for further growth with consolidation inevitable.

• Although the cable sector still leads the market, it has been slow to convert to digital and subscriber numbers are declining.

• DTH is still expanding but primarily through customers switching from their cable service.

Romania, split of TV households by platform, 2006-2011

Romania, split of TV households by platform, 2011

Analog cable33%

Digital cable11%

Pay digital satel-lite

28%

Free digital satellite

2%

Analog ter-restrial27%

5

Pay-TV landscape

• Pay-TV platforms and operators

• Operator market performance

• Key developments

• Multiplay services and bundling

• Key market dynamics


Pay-TV platforms and operators


• RCS Romania takes nearly half the pay-TV market with its leading cable service continuing to grow despite the sector having peaked. It also led the DTH market until 2010, when overtaken by Romtelecom.

• Despite DTH success, Romtelecom’s Dolce IPTV service has failed to make an impact on the market, with subscriber numbers stalled at around 31,000.

• UPC’s cable subscriptions have been in decline since 2007. Although its DTH service FocusSat is still expanding it remains far behind RCS and Digi TV.

Source: Informa Telecoms & Media; WBIS

Romania, subscriber growth/decline by major operator, 2005-2011 (000s)

Romania, multichannel market share by major operator, 1Q12

2005 2006 2007 2008 2009 2010 20110

500

1,000

1,500

2,000

2,500

RCS Romania (Cable) UPC Romania (Cable) RCS Romania (DTH) UPC Romania (DTH) Romtelecom (DTH)

7

RCS Ro-mania49%

UPC19%

Rom-telecom

20%

AKTA4%

Others8%

Operators: Subscriber market performance


Year-end data 2006 2007 2008 2009 2010 2011 1Q12

RCS Romania (Cable) 90,000 10,000 250,000 237,300 134,300 209,000 55,000

UPC Romania (Cable) 31,000 (146,400) (114,400) (39,500) (138,800) (69,900) (3,400)

RCS Romania (DTH) 320,000 570,600 31,100 (21,700) (90,100) 129,900 9,500

UPC Romania (DTH) 50,300 64,700 40,300 25,700 45,600 56,200 1,000

Romtelecom (DTH) 60,000 330,000 253,000 241,100 139,900 126,200 2,000

Source: Informa Telecoms & Media; WBIS

Romania, annual net subscriber additions/losses by major operator, 2006-2012

8

• Pay-TV leader RCS supplies cable to 70 cities, as well as to Croatia, Serbia, Slovakia and Hungary. However, reports suggest that RCS&RDS is struggling financially. Romtelecom-owned Dolce TV overtook former DTH leader Digi TV (RCS&RDS) primarily due to low-cost promotional strategies.

• The sector has seen some consolidation, with Romtelecom buying up smaller operators such as Boom TV in February 2011 via its NextGen cable unit. The market remains fragmented though, with over 500 operators. According to the Romanian Cable Association (ACC), financial problems mean operators are struggling to upgrade networks and invest in value-added services, such as VOD, HD and DVR.

• Rumours of RCS making a bid for UPC Romania in early 2011 have not come to fruition. Such a move would create a dominant player in the cable and satellite sectors.

Key developments – operators

Date Development

March 2011

Romtelecom continues to consolidate the DTH market by acquiring the customers and assets of AKTA Satelit from Digital Cable Systems.

October 2011

RCS Romania is fined €2,313 by the National Audiovisual Council for refusing to distribute the GSP TV sports channel.

October 2011

UPC Romania adds the country’s first 24/7 3D channel to its cable offering. High TV 3D brings over 400 hours of native programming encompassing lifestyle and entertainment.

December 2011

RCS Romania secures a loan of €300 million with €200 million already granted by BCR, CEC and Credit Suisse.

January 2012

Romtelecom increases its presence in the Romanian cable sector by investing a further €2 million in NextGen Communications. The incumbent telco already has a strong share of the DTH and IPTV markets.

February 2012

Incumbent telco Romtelecom announces 2011 EBITDA of €119.1 million, down 23% on 2010. This produced an operating loss of €299.6 million.



Date Development

March 2012

RCS Romania launches the country’s first full HD news service, known as Digi 24. RCS has focused on developing its own channel portfolio in the face of strong competition from UPC and Romtelecom.

March 2012

UPC Romania reveals 2011 revenues of US$143.5 million, down 2.7% on 2010 primarily due to a decline in TV subscriber numbers. However, the emphasis on triple-play bundles saw total revenue generating units increase 3.3% to over 1.6 million.

March 2012

Liberty Global CEO Mike Fries restates the company’s intention to stay in the Romanian market. Rumors had suggested UPC Romania was a takeover target for RCS in 2011, but Fries denied it was open to any such move and revealed Romania was the company’s best performing market relative to budget.

March 2012

UPC expected to launch its Horizon service in 2013, with high demand expected for the advanced settop. The much anticipated Horizon box will offer multiscreen viewing, catch up and on demand services and a wide range of TVOD options.


Key developments – operatorsDate Development

April 2012 The National Audiovisual Council takes action against OTV for airing political advertising contrary to the Broadcasting Act. The programs supporting Dan Diaconescu as future president in April have resulted in the regulator reducing the period OTV is allowed to broadcast from September 2012. It had already been punished for a similar indiscretion with time on air set to be reduced from April 2013.

April 2012 Romtelecom secures the rights to the UEFA Champions League until May 2016 with live matches broadcast on Dolce Sport and other operator’s dedicated sports channels.

April 2012 With Greek telco OTE struggling to finance its debts, rumors persist over further asset sales with Romtelecom a possible divestment. OTE has debts of over €500 million and has already sold off its stake in Telekom Srbija this year.

April 2012 Cable operator DCS secures a loan of €15 million from the EBRD to upgrade networks and extend triple-play packages into new areas. Backed by AIG and operating under the AKTA brand, DCS has struggled to increase its subscriber numbers in a saturated market but remains the third largest cable provider with 250,000 customers.


Key developments – operatorsDate Development

May 2012 ANCOM reports the number of cable subscribers taking digitals services doubled in 2011 with a quarter now upgraded. This is still significantly behind other countries in the region and cable remains urban-focused with nearly 80% of subscriptions in towns and cities.

May 2012 Telenor provides UPC DTH with additional capacity for new HD channels, utilizing its One West Orbital slot. This will allow UPC Romania’s FocusSat platform to add Eurosport HD and Eurosport 2 HD before the Euro 2012 football championships.

June 2012 UPC Romania launches a remote control for children known as Teki, with buttons for children’s channels, a games portal and DVR functionality. The service is free to existing dual- and triple-play subscribers and highlights UPC’s strategy of add-on services targeting high-end customers.

July 2012 Piracy remains a problem in Romania with RCS complaining that video content is being provided illegally by vplay.ro; the 8th most visited site in Romania. RCS has angered subscribers by blocking access to the site, with some threatening to move to rival operators.



Date Development

July 2012 Thousands of Romtelecom subscribers will be offered the chance to upgrade their broadband connection to fiber free of charge. Up to 600,000 households in Bucharest are covered by the fiber-optic network, offering speeds of 100 Mbps. It remains behind the 120 Mbps speeds offered by UPC Romania but progress is vital in utilizing triple-play bundles in a competitive market place.

August 2012

RCS Romania continues to acquire smaller cable operators, adding Pacris to its portfolio. The Constanta-based platform had up to 10,000 subscribers, and estimates suggest RCS gained some 200,000 cable subscriptions in 2011 purely through acquisition.

August 2012

Digital Cable Systems (DCS) will undertake major restructuring in October 2012, with 4 companies merged into a single operation. Cable Net, Canad Systems Group, Parlatel and Marnisat Media are already 99% owned by DCS. Operating under the cable brand AKTA, DCS expects the move to reduce administration costs and simplify decision making.

August 2012

Romtelecom posts a surprising fall in TV subscribers with 1,207,461 at end-June 2012 being 1.2% lower than a year earlier. Owner OTE suggested this was due to ‘portfolio redesign’ and TV revenues were up with customers migrating to higher-priced subscriptions.


Multiplay services and bundling

Provider Fixed broadband (FB)

Fixed telephony (FT)

TV Mobile broadband (MB)

Mobile telephony (MT)

Wi-FI hot spots (WF)

Romtelecom ADSL, VDSL, FTTB

PSTN/ ISDN

IPTV, Cable, DTH

Own network

No No

RCS Romania

Cable, FTTB

VoIP, Fixed wireless

Cable, DTH

Own network

Own network

Yes


14

Multiplay services and bundling: TV component

Provider TV service (technology)

Channels (SD/HD)

Other details (DVR, technology suppliers, pricing…etc)

Romtelecom Cable 123 SD (6 HD)

Triple-play Dolce Maxim with all channels, 100 Mbps broadband and telephony for €21.08 per month. Dolce Variat with 68 channels, 2 Mbps broadband and telephony for €16.12 per month. Multiroom available.

RCS Romania

CableIPTV

87 SD cable, 86 DTH (11 HD)

Quad-play packages available.WiFi hotspots available free of charge to subscribers.


15

Key market/competitive dynamics


• The pay-TV market is saturated at around 71% of TV households, although a large disparity still exists between urban and rural areas. Operators are seeking to increase availability and invest in infrastructure to capitalize on these ‘lost’ potential customers.

• The cable sector is losing subscribers having been slow to upgrade to digital, with many customers opting for DTH services and incumbent telco Romtelecom in particular. Price cuts in the cable sector have left the main operators struggling financially.

• Consolidation has already been evident, with Romtelecom buying Boom TV and the DTH branch of AKTA. The number of acquisitions looks set to accelerate as operators seek new ways of boosting subscriber numbers in a competitive market.

• UPC has been losing subscribers consistently for several years but denied speculation of a takeover bid from market-leader RCS Romania. It has focused on higher-spending customers, adding HD channels, OTT services and the country’s first 3D channel. In addition, the focus on triple-play services has increased ARPU, so preventing revenues from declining significantly.

Next-generation TV

• Market developments

• Multiscreen/OTT tracker


Next-generation TV market developments

Date Development

November 2011

CME announces it will begin charging for its VOD service Voyo, with subscribers offered unlimited viewing each month with little or no advertising.

December 2011

Public broadcaster TVR commits to the rollout of hybrid TV during 2012. Along with over 20 members of the European Broadcasting Union they will exchange best practices on the concept and support the fast, comprehensive rollout across Europe.

December 2011

Orange launches an Android app giving mobile subscribers access to 17 TV channels. The service is free of charge to customers taking the Panther package.

February 2012

Samsung enters into partnership with CME to make the Voyo SVOD service available on its Smart TVs..


Next-generation TV market developments

Date Development

April 2012 CME’s VOD service Voyo adds Voyo Cinema to its Romanian offering, with over 400 films and TV shows available for €3 per month.

April 2012 Romtelecom’s Dolce subscribers are now able to access VOD service HBO GO. All customers taking the HBO MAXPAK channels can use the service on Internet-connected devices, with over 600 hours of programming renewed on a weekly basis.

July 2012 Romtelecom launches Dolce Mobile TV, in association with Cosmote Romania. The TV Everywhere product is accessible through an app that the two companies subscribers can download onto smartphones and tablets. Initially free of charge it will feature 35 live channels along with sporting events and catch-up programming.

August 2012

Liberty Global agrees a deal with CME for UPC Romania to offer the latter’s Voyo online VOD service to subscribers. Voyo.ro is available for €3.7 per month and consists of over 500 titles, rising to over 1,000 by the end of the year. The CEO of UPC Romania stated the partnership would allow UPC to bring premium online entertainment into subscribers homes through their Internet service.


Multiscreen/OTT tracker

Broadcast group

OTT service name

Service type/focus

Service metrics Key devices

Central European Media Enterprises

VoyoVoyo Cinema

VOD 78,000 subscribers at end-June 2012 across CEE region

Smart TVTabletsSmartphones

Romtelecom Dolce Mobile TV Multiscreen + linear TV and catch-up

Not yet announced

TabletsSmartphones


Viewing and programming

• DTT

• TV viewing and programming


DTT


• With no DTT launch and cable networks slow to upgrade, just 38% of TV households were taking digital services by end-2011.

• In 2010 ASO was delayed from its original 2012 target to 2015. The president of the National Authority for Management and Regulation in Communications of Romania (ANCOM) has called the move a mistake. The decision stopped dead a DTT tender taking place at that time.

• It is now expected that a new tender for DTT will be issued in 2H12.Instead of being auctioned separately, as before, licences for all six multiplexes will be held at the same time.

Romania, digital HH vs. analog HH (000s) 2005-2011

Romania, primary DTT HH vs. TVHH, 2010-2016

2005

2006

2007

2008

2009

2010

2011

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

Digital Analog

2010 2011 2012 2013 2014 2015 20160

500

1000

1500

2000

2500

3000

0%

5%

10%

15%

20%

25%

30%

35%

Primary DTT HH (000s) DTT/TVHH


DTT

• DTT coverage is now scheduled to reach 95% of the population by end-2015. Public channels TVR1 and TVR2 won digital licenses in August 2009.

• DTT trials are still ongoing in Bucharest while CME-backed Pro TV is distributing digital channels terrestrially throughout the city, including an HD version of its flagship channel.

• France’s TDF and satellite operator SES confirmed interest in helping the DTT transition in October 2011. The government is seeking parties to build infrastructure and own towers.

• ANCOM put the cost of switchover at around €300 million. The government is prepared to allocate around €146 million to subsidize 1.4 million lower income households, around 900,000 of which will be rural homes. This will help those still receiving analog terrestrial signals by 2015 to purchase an MPEG-4 settop, which typically retail at around €90.


TV viewing and programmingBroadcast group (owner)

Channels Audience Key content Imports

Central European Media Enterprises(CME)(49.9% Time Warner)

Pro TV (HD)Acasa TVPro CinemaPRO TV ChisinauSport.roMTV RomaniaAcasa Gold

18-4918-4918-4915+

General15-34Females 15-49

Romania’s Got TalentVoice of RomaniaPro TV NewsHappy HourRomania, te iubesc!

South ParkDexterChuckCSI: MiamiYoung and the RestlessMerlinSkins

Romanian Televison Corporaton (TVR)

TVR1 (HD)TVR2TVR3TVRi

General Exclusive UEFA Euro 2012 coverageLondon Olympic Games

Ora de stiriJurnalul TVR

LostMad MenCSIGrey’s AnatomyHouse M.D.Doctor Who

Intact Media Group

Antena 1Antena 2Antena 3Antena 4

GeneralGeneralNewsLifestyle

Next Top ModelNarcisa- lubiri NelegiuteAcces DirectPlasa de steleObservator

Battlestar GalacticaTop GearX Factor


TV viewing and programming

Source: CME

• CME’s flagship channel Pro TV has led the all-day and primetime ratings for many years. Launched in 1995 it now reaches 96.4% of the population and broadcasts 24 hours a day. CME also owns the 4th most popular channel, Acasa TV.

• The market is extremely fragmented, with the top 3 channels taking just 40.8% of total all-day viewing in 2011.

• Public broadcaster TVR struggles to keep pace with competitors, with Intact Media Group’s Antena 1 in second place by some distance.

Romania, all-day viewing share by major broadcaster, 2006-2011

Romania, all-day viewing share by major broadcaster, 2011

2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

Pro TV Antena 1 TVR1 TVR2 Acasa TV Prima TV


Pro TV18%

Antena 112%

Acasa TV5%TVR1

4%TVR21%

Prima TV7%

Others53%


Source: CME

• CME’s Pro TV News show was the highest-rated news program in Romania in 2011 with an average audience of 27%.

• CME reported net revenues of US$159.4 million for its Romanian operations in 2011, up 1% from US$157.4 million in 2010. This represented positive progress for the company, having seen revenues drop more than 10% in 2010. However, EBITDA fell a little to US$25.9 million, down from US$26 million in 2010. Revenues for 1H12 were US$67.5 million compared to US$81.4 million in 1H11.

Romania, primetime viewing share by major broadcaster, 2006-2011

Romania, primetime viewing share by major broadcaster, 2011

2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

Pro TV Antena 1 TVR1 TVR2 Prima TV Acasa TV


Pro TV22%

Antena 1

12%Acasa TV6%TVR1

4%TVR22%

Prima TV7%

Others48%


• Time Warner increased its stake in CME from 40% to 49.9% in July 2012, having originally acquired 31% for US$242 million in 2009.

• Public broadcaster TVR has closed two channels due to financial difficulty. TVR Cultural and TVR Info ceased broadcasting, with the former merging with TVR2 as a rebranded TVR2 Cultural in August 2012. Debts of around €145.6 million will reportedly take over 7 years to pay off. As other countries in the region add to their range of channels, the decision has been unpopular in Romania.

• Indian channel Bollywood HD launched in Romania in August 2012, following Bollywood TV, Classic and Bollyshow launches earlier in the year. All are distributed by Romtelecom and UPC.

• Changes to the must-carry rules were rumored in 2011 but little progress has been made, with the government not wanting to add economic pressure on commercial broadcasters by removing them from the agreement. The cable industry would however welcome such a move with operators struggling financially themselves.


TV advertising


• Following a crash in advertising expenditure in 2009 and further decline in 2010, Romania saw a modest return to growth in 2011. Greater expansion is forecast for 2012, supported by GDP growing 2.5%, according IMF estimates. However, total ad spend will remain well below pre-crash levels with broadcasters continuing to struggle financially.

• TV has remained the dominant advertising medium, taking 77.8% of total advertising expenditure in 2011 and expanding 1.5%.

• ProSiebenSat.1. owner of Prima TV in Romania, reported its 1H12 advertising revenues in the country to be down 22.3% year-on-year.

Romania, advertising expenditure, 2006-2011 (US$ million)


2006 2007 2008 2009 2010 2011e0

500

1,000

1,500

2,000

2,500

3,000

3,500Gross all ad spend Gross total TV ad spend Net total TV ad spend Net free-to-air TV ad spend

TV advertising

• Romanian law prohibits local companies from spending more than 3% of net profits on advertising. The result is that the majority of advertising revenues are from foreign companies.

• Advertising airtime is limited to eight minutes per hour for public television and 12 minutes per hour for commercial channels. However, with TV channel promotions, this can add up to as much as 20 minutes of advertising breaks. Tobacco products cannot be broadcast on TV. Political advertising is banned except during elections.


TV forecasts


• Cable penetration is in decline and anticipated to reach 39% by end-2017. The public are yet to be convinced of the need to upgrade to digital and by 2017 60% are forecast to take digital packages, resulting in 2 million digital cable homes.

• There are several DTH players. Despite only having come to the market in 2004, pay

DTH has already made a significant impact, but appears to be approaching its peak. It is forecast to have 2.5 million subscribers by 2017.

• DTT trials began in 2006 but commercial services have continually been delayed. Assuming full launch proceeds in late 2012 some 2.5 million homes will take DTT as their primary TV signal by end-2017.


Analog cable33%

Digital cable11%Pay digital satellite

28%

Free digital satellite2%

Analog terrestrial27%

2011

Analog cable16%

Digital cable24%

IPTV2%

Pay digital satellite28%

Free digital satellite

2%

Primary digi-tal terrestrial

29%

2017

Pay TV

Cable

Digital

DTH

DTT

Broadband

IPTV

Multiscreen

Advertising

Piracy

0

5

Informa viewpoint


• Although pay-TV penetration is near its peak in Romania, there remain opportunities to extend coverage to rural areas, with the vast majority of subscribers living in urban areas. Investment in improving infrastructure availability will be vital to having access to the widest customer base possible.

• The once dominant cable sector is now in consistent decline, although it will remain a vital part of the TV industry in the coming years. Customers need to be convinced of the benefits of digital upgrades with analog penetration still very high, but there are some signs of progress being made.

• Consolidation has been a key strategy for larger operators already and will accelerate as opportunities for organic growth prove more difficult.

Romania, television market scorecard


Informa viewpoint

• Rumors of RCS Romania bidding to buy UPC Romania have not come to fruition but would create a dominant DTH player to overtake Romtelecom. However, RCS Romania continues to struggle financially itself and UPC has denied any intention to sell its Romanian operation.

• The future ownership of Romtelecom also hangs in the balance, with Greek owner OTE selling off a range of assets to manage debts.

• Operators have looked towards bundled services to create higher ARPU customers, with UPC in particular emphasizing the important of triple-play. Some 17% of its customers took triple-play services in 2011, ensuring revenues have not significantly declined.

• Price cuts in the cable sector have made standalone TV service profitability almost impossible - in the face of difficult macroeconomic conditions.

• A 3-year delay to anticipated ASO has set back DTT progress, with the ANCOM president blaming the decision for creating uncertainty. Trials are still taking place but clarification is needed soon to ensure the latest ASO deadline is met. Assuming a full launch takes place in late 2012, the service should pick up subscribers very quickly.


Informa viewpoint

• Cable piracy outside Bucharest continues to be a major problem. Numerous cable systems retransmit unauthorized satellite TV programs, most of which are dubbed into Romanian. Some networks also broadcast pirate videos.

• Measures introduced to curb the problem in 2005, such as tougher jail sentences and hefty fines, have failed to make an impact and greater attention on the matter is required if legitimate operators are to increase revenues.

• Online piracy has also been problematic, with RCS blocking access to vplay.ro for distributing its video content illegally. As the 8th most popular website in Romania, subscribers have been angered and threatened to leave RCS for a rival.

• Without tougher piracy regulation, operators and ISPs could be left with little choice but to maintain access to illegitimate sites or risk hefty subscriber losses. The prevalence of such websites will also limit the success of pay-models of OTT, despite the early promise shown by good uptake for CME’s Voyo platform.


Adrian ReynoldsAnalyst, Informa Telecoms & Media

E-mail: [email protected]

34

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Make better business decisions. Romania TV update September 2012 Adrian Reynolds, Analyst 2