Latin America’s Pay-TV Price Wars

May 21, 2009

Not long ago, I talked in this blog about the important challenges that Claro faces in Central America amid strong competition from healthy rivals. One of my points was that the company must use its leverage as the fixed incumbent to promote bundles and expand into broadband and pay-TV. This week, Claro launched in El Salvador perhaps its most aggressive campaign in several years, attacking Tigo’s integration of Amnet under its successful Tigo brand.

As we described in our El Salvador media forecast, the tough economic conditions will shave pay-TV’s net additions to a fraction of the 2008 level. During this brand campaign, Tigo is giving away four months of basic pay-TV service, three months of basic broadband Internet and 3,000 minutes to the US to those who subscribe to a package during the “Mega Semana” promotional week. This is a very generous offer and will definitely hurt ARPS. The logic behind it is that clients who subscribe to a triple-play offer are clients stolen from a competitor (most likely Claro). Otherwise, they are current postpaid clients without a bundle but with an income level that leaves them less vulnerable to the economic crisis. Thus, by giving away four months, Tigo is buying time to see if the economic conditions improve.

Also, Tigo is trying to shield its pay-TV base from the real threat, Sky, which secured the exclusive rights to broadcast the extremely popular Spanish soccer championship “La Liga.” This alone is reason enough for Salvadorians to switch their pay-TV provider! Since Tigo recognizes this as a real threat to its base   — and I agree — Tigo is giving four months of free pay-TV to overlap with the start of the Spanish soccer season in August, a period of time where it could see a heavy chunk of defections to Sky. The moment of truth will come after the three to four month period, when we see how many of Tigo’s customers decide to remain with Tigo and pay and how current customers will react. I think that considering the challenging economic conditions and the rising threat of competition, market leader Tigo is doing the right thing to go after customers.

Claro has had multiplay packages for a while, and we have witnessed the company gaining subscribers, particularly through its cheaper DTH service. But the groundbreaking step, as we forecast in our El Salvador country intelligence report, is the launch of prepaid DTH. We have seen prepaid TV from DirecTV in Peru, Chile and Colombia, but the cost of the installation kit makes them unsuitable for mass adoption, the way expensive handsets were at one point for mobile telephony. In El Salvador, Claro is offering the installation kit for free (list price is $130) and pay-TV from as low as $1.50 per day (see Exhibit). The kit subsidy will definitely hurt margins in the short term but opens an untapped market, which could be game changing. If Claro can make customers “pay” for the installation kit in a couple of months with an ARPS closer to postpaid (the basic postpaid package runs from $11 per month), the bet would definitely pay off and would rapidly position the company to grab a share of the next segment once the higher-end segments are fully penetrated.

Now is a good time to be a pay-TV customer in El Salvador.

— Jose Magana, Analyst

Related content:

Communications Markets in El Salvador
Country Intelligence Report published May 2009
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Millicom’s Acquisition of Amnet to Shake Up the Claro and Telefónica Domain
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Latin America Mobile Demand Forecast, Q1 2009
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