Regulatory hurdles loom large in the way of a potential Telefonica-DirecTV Latin America deal

29 January 2016

The full acquisition of DirecTV Latin America would bump Telefonica ahead of long-time rival America Movil in the region’s pay-TV space. However, the deal would most certainly face regulatory hurdles due to competition concerns.

Recently AT&T’s CEO said that the company may consider selling its recently-acquired DirecTV assets in Latin American markets. The executive expressed that, although the DirecTV business in Latin America is well run, the business is a single-product offering that does not necessarily align with AT&T’s increasing focus on bundled services. Spanish group Telefonica has been identified as a potential buyer of DirecTV’s Latin American assets, and much has been written and speculated in the media over the last week.

Although a deal has not been confirmed by any official source, we wanted to outline some of the key market implications and regulatory issues that could get in the way of a potential Telefonica-DirecTV deal. Although DirecTV also owns wireless spectrum in several of its Latin American markets (e.g. Brazil, Colombia, Peru and Venezuela), our analysis solely considers the sale of DirecTV’s pay-TV assets in the region.

More subscribers, more leverage.

With access to video content increasingly important for subscriber acquisition and retention, operators are consistently working on gaining scale to have the upper hand when negotiating content. If the acquisition fully closes, Telefonica would significantly scale up its pay-TV business in Latin America, thus enhancing its bargaining power with content providers as well as with video head-end infrastructure suppliers.

Telefonica is a major force in Latin America’s fixed and mobile markets, but the operator has a relatively small presence in the region’s pay-TV market. At year-end 2015, Telefonica captured an estimated 6.4% of Latin America’s pay-TV market. In contrast, DTH/satellite operator DirecTV is the leading pay-TV operator in the region, with a subscriber market share of 27.7% at year-end 2015.

EXHIBIT 1: PAY-TV MARKET SHARE BY OPERATOR, LATIN AMERICA, 2015

undefined 

*Includes GVT / **Includes Sky Mexico

Sources: Operators, Pyramid Research

 

Technology integration.

The integration of DirecTV’s network assets wouldn’t pose a significant challenge to Telefonica, as it already operates DTH/satellite networks across most of its Latin American markets. Further, Telefonica owns Media Networks Latin America, a DTH wholesaler that buys capacity — bandwidth and TV channels — and resells it in flexible packages through a white label model.

EXHIBIT 2: PAY-TV DELIVERY TECHNOLOGY, TELEFONICA AND DIRECTV, SELECTED LATIN AMERICAN COUNTRIES, 2015

undefined

*Includes GVT / **Sky Mexico

Sources: Operators, Pyramid Research

Unlock bundling opportunities.

An ongoing focus for Movistar has been to lock-in subscribers with multiplay packages to protect market share and deter subscribers from switching to the competition. In Peru, for instance, around 58% of Telefonica’s pay-TV customers currently subscribe to triple-play packages. Further, in Chile, Telefonica reported that 52% of its traditional fixed access base subscribes to double- and triple-play packages. Peru and Chile are two of Telefonica’s largest pay-TV markets in the region.

Through the acquisition, Telefonica has the ability to enhance its multiplay offerings and expand beyond the 34% combined market share through cross-selling, particularly in markets such as Central America, where the operator has a mobile/fixed arm but no pay-TV business. America Movil and Millicom lead the Central American pay-TV market, with subscription market share of 33.7% and 16.8% at year-end 2015, respectively. DirecTV (Sky) controlled 9.8% of the market.

Regulatory restrictions.

In the past few years, regulators across Latin America have brought forward specific regulation seeking to stimulate effective competition in all segments of the telecommunications market, including the pay-TV market. We foresee several regulator and competition agencies in the region rejecting or challenging a potential Telefonica-DirecTV deal, based on market concentration concerns. We analyze the likelihood of regulatory opposition in major regional markets:

EXHIBIT 3: POTENTIAL REGULATORY HURDLES, TELEFONICA ACQUSITION OF DIRECTV’S PAY-TV ASSETS, LATIN AMERICA

undefined

Sources: Regulators, Pyramid Research

 

- Guillermo Hurtado, Senior Analyst

 

 

For more information about Pyramid's products and services, please visit www.pyr.com and email us at info@pyr.com.

More Pyramid Points