Incumbent operator Portugal Telecom casts a long shadow over the Portuguese telecommunications market, including the Pay TV segment, where the incumbent’s TV Cabo holds an overwhelming market share. Nonetheless, an increasingly hostile regulatory environment will weaken PT’s grip over Portugal’s telecoms market, especially in broadband, while the advent of IPTV and triple-play packages may spread the malaise to PT’s Pay TV segment. As a result, Portugal Telecom would do well to take precautionary measures to boost its Pay TV subscriber base now, preventively taking the air out of future IPTV challengers.
Portugal Telecom holds the incumbent position in both the Pay TV and broadband segments. TV Cabo, a segment of the incumbent’s PT Multimedia subsidiary, holds a 76 percent market share of the country’s Pay TV connections, with 1.096 million cable and 389 thousand DTH subscribers. Its dominance over broadband connections is not as extensive, although it is still thorough; with a total of 889,000 broadband connections at the end of the third quarter of 2005, it holds a 68 percent market share in the segment. Significantly, PT’s reach goes beyond the mere provision of a pipe; it holds stakes in premium television content operations and is an important distributor of cinema, directories, and Internet access.
Despite the incumbent’s market power, smaller players see an opportunity to compete by positioning themselves as triple-play providers and embracing digital programming. Cabovisão was the first Portuguese operator to launch a high-definition channel, unveiling its HD1 channel in August. Elsewhere, the SGC Telecom investor group purchased Jazztel’s fixed wireless assets and its 30,000 subscribers earlier this year, and has pledged to invest 800 million euros in the next five years by launching a new operator called AR Telecom. The new operator will likely offer IPTV through its proprietary broadband radio technology. Most importantly, Sonaecom, the country’s second-largest fixed operator, is preparing to launch TVoDSL services before the end of 2005.
Regulatory decisions will increasingly force the incumbent to open its networks, leading to more competition and greater broadband penetration. This could have a negative impact on its Pay TV market share in two stages. First, alternative ISPs can use local loop unbundling to ramp up the speed of their broadband services, potentially having enough bandwidth to offer TVoDSL. Second, as the broadband market grows, so too will the market for TVoDSL, leading to a potentially virtuous circle of greater investment, differentiated offerings, and cable TV deals.
Given that broadband penetration will increase, Portugal Telecom must cultivate the Pay TV market in order to reduce churn and preempt further competition from players offering IPTV. PT already has plans to increase the number of passed households in urban areas and is succeeding in increasing digitalization of its cable subscribers. In addition, it is improving its content offering, adding 20 new channels on a new layer above its basic 40-channel plan, rolling out ethnic channels to target immigrant communities in Portugal, and launching a localized sports channel called Sportv2. The company expects to add even more channels and services in 2006.
Portugal Telecom must play a delicate balancing act, safeguarding its current sources of revenues while at the same time staying on the technological edge and preventing market share erosion to broadband providers using local loop access. PT, despite already providing the all triple-play component services through its different subsidiaries, has so far been more hesitant than its challengers to embrace bundled services. Furthermore, its management has indicated little interest in an aggressive move in this direction. Still, it recently launched a VoIP and video-sharing service in its broadband instant messaging platform, Sapo Messenger. It offers premium content to its Pay TV customers through its broadband portal. It would do well to concentrate more on promoting its Pay TV portfolio, even if that means further engagement in the triple-play arena.
