Video on demand in emerging markets

Video on demand in emerging markets

The Delta Perspective

Partnerships with telecom operators

Katarina Vitkova and Victor Sunyer
The advancement of the Internet has seen consumers shifting from traditional linear TV to the on-demand model. Video-on-Demand (VoD)’s popularity in the US, where Netflix’s subscriber base has surpassed two major cable players1 (Time Warner and Comcast) combined, is clear. Yet, in emerging markets, the VoD phenomenon is still at its infancy and telecom operators have the opportunity to lead and shape the VoD landscape.
VoD opportunity in emerging markets
The popularity of video-on-demand (VoD) in the US contrasts with emerging markets. Even though Netflix’s success has led to the ‘mushrooming’ of local players (see Exhibit 1), none of them has transformed into a relevant platform, leaving the VoD sector in emerging markets still largely untapped.

Source: Companies websites; Delta Partners analysis

Telecom operators in emerging markets are especially well positioned to drive the nascent VoD space as they are at the intersection of both access and the customers within the TMD value chain. The operators also have the ability and experience of bundling wide range of value-added services and have access to better financing options for investments.
How can telecom operators tap into the VoD space?
Based on past telecom operators’ initiatives, we believe there are three potential market entry routes to consider when targeting the VoD space (see Exhibit 2).

Source: Delta Partners analysis

1.Organic development
To maintain maximum control, telecom operators try to develop the VoD product largely organically and rely selectively on third-party service providers for content procurement and technical development. Telefonica’s recent appointment of Grey Juice Lab as content aggregator for its VoD services in Argentina and Chile is a great example. Beyond content, Grey Juice Lab will also provide Telefonica with marketing services, content processing, quality control and editorial services.
In Africa, two of the leading telecom groups chose the route of partnership and entered into a distribution agreement with Nollywood’s iROKOtv. In Rwanda, Tigo will be the main platform to distribute iROKO’s VoD service to its 4G customers in Kigali and eventually across the rest of the country once 4G coverage extends across the country. In Ghana, Vodafone will distribute iROKOtv’s service to its fixed broadband customers in an attempt to further enhance its commitment to providing unmatched entertainment experience for its customers.
Among the latest entrants into the VoD space is the Philippines’ PLDT that opted to maximise the upside potential and entered into an equity joint venture with iflix, an emerging SVoD (subscription video-on-demand) platform that aims to become the Netflix of South East Asia. In line with the company’s strategy to develop new revenue streams and lead in the digital space, PLDT has invested USD 15 million to support the roll-out of iflix video streaming service across South East Asia.
Interestingly, despite the lack of know-how, the entrepreneurial mindset and relevant relationships required to successfully venture into the VoD space, organic development is a popular option among telecom operators in emerging markets. Although a commercial partnership with an existing VoD player addresses all these factors, the operator’s role is restricted to that of a ‘distribution channel’ with upside potential limited to a share of revenues/EBITDA.
Only M&As, specifically joint ventures, open the door for telecom operators to get the best of all worlds – a relatively high degree of ownership and control, access to know-how, faster time-to-market and upside potential beyond revenues in the form of equity stake appreciation. As such, we are convinced that equity joint ventures should be the preferred entry strategy for operators in emerging markets looking to expand their product offering and preserve their customer base in today’s digital age. 
1Average of Time Warner Cable Standard TV, Time Warner Cable Preferred TV, Comcast Xfinity TV digital starter, Comcast Xfinity TV digital premium of around $ 50 per month with Netflix existing customers charged $7.99/month; All new customers charged $8.99/month
*Delta Partners acted as a sole strategic and financial advisor to PLDT on a USD 15 million investment in IFlix to roll-out its SVoD service across selected South East Asia markets.

About the authors

Katarina is an Associate at Delta Partners where she works on Corporate Finance and M&A engagements. Katarina has over five years of corporate finance and strategy consulting experience focused on TMT in emerging markets. Katarina holds an MSc in International Management from ESADE University, Spain and BSc (Hons) in International Economics and Management from Bocconi University, Italy.

Victor is a Director at Delta Partners where he works on Corporate Finance and M&A engagements. Victor has over 11 years of experience in M&A, Corporate Finance, Venture Capital and strategic management consulting within technology and telecom engagements in Europe and Middle East. Prior to joining Delta Partners in 2012, Victor worked at UBS Investment Bank in London, Diamond Cluster (now Oliver Wyman) in Barcelona and Proventure Capital Partners where he was a founding partner. Victor has an MBA from INSEAD (Singapore/Fontainebleau) and BBA and MBA with honors from ESADE Business School.