Death of a dream: Africa’s pay TV challenger GTV runs out of financial road

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Last Friday Gateway Broadcast Services (GTV’s operating company) announced today that its Board of Directors has unanimously approved a plan to liquidate the Company. Its statement blamed “excessive demands on the business” caused by the global financial crisis that “interrupted (its) ability to secure funding on an acceptable timescale and have left us no choice but to cease operations”. Russell Southwood looks at where it all went wrong.

To understand how GTV came to be launched, it’s necessary to go right back to the beginning and start with Gateway Communications. Ex-banker Julian McIntyre and his friend Ghanaian-Briton telecoms manager Peter Gbedemah launched the company over ten years ago and worked out of a modest set of offices near Warren Street in London. They were part of a very small group of people outside the continent who could see its potential and sought to provide international wholesale services to ISPs and carriers. Africa wasn’t one of its markets, it was its market.

Among other things, McIntyre bought a banker’s instinct for deal and the company thrived on a combination of organic growth and acquisition. Some acquisitions like the company that became its South African subsidiary were a shining success, whilst others like Datatel in Sierra Leone less so. There were ups and downs but the company continued to grow.

The turning point came in 2005 when mobile operator Celtel (now Zain) decided to sell a number of its non-core businesses prior to carrying out the IPO that led to its trade sale to MTC. In order to make the deal attractive, Celtel gave a long-term commitment to Gateway Communications as the buyer that it would use it as its wholesale carrier. In a single leap the company had gone from being an interesting challenger to being a significant player: it could now lay claim to around 20-25% of the market for international voice traffic and this would grow to 30% over three years.

With the acquisition of Link Africa, the company had an assured stream of business and a positive cash flow. It had become “bankable” on a much larger scale. Faced with this happy circumstance, the question then arose: what can we do next? A number of possibilities were investigated and a decision was taken to enter the Pay-TV market in Africa that was announced publicly in February 2007.

Pay-TV in Sub-Saharan Africa was dominated by two large players: Naspers-owned DStv/Multichoice in Anglophone territories and Vivendi’s Canal Plus in Francophone territories. Both had invested significantly in rights and were charging relatively high monthly rates for access to their services.

The strategy was two-pronged: firstly, to provide users with lower subscription rates (US$20-35 per month) and secondly, to acquire compelling content to drive that process. Rupert Murdoch has described sports rights as the “battering ram” of successful Pay-TV and Africa is no exception. So in May 2007 GTV announced that it had bought the UK Premiership rights for 40 Sub-Saharan African countries. These countries did not include Nigeria and South Africa that were considered sufficiently large to be sold separately. Although it would not discuss the cost, Nigeria’s Hi-TV spent US$28 million on getting them for Nigeria and GTV’s rights cost US$30 million.

Although the Premier League does give some “holiday” on full payment, this kind of gearing meant that GTV had to maximise its income as quickly as possible in order to show new investors some kind pattern of progress towards a cash-positive operation. So it was a sprint from the start as the company launched in 10 countries (East Africa followed by Southern Africa) and sought to establish itself as a continental brand.

This sprint for growth was backed by the Swedish group Kinnevik (more of which later) with a US$40 million investment and Citigroup, Noonday Global Management and Avenue Investment Management. McIntyre was supremely confident that GTV would kick down DStv/Multichoice’s front door, get more subscribers than it outside Nigeria and South Africa and move on to compete with Canal Plus in Francophone territories. The Premiership rights almost by themselves would be sufficiently persuasive to get subscribers to switch from the incumbent and that a deeper bouquet could be built as things progressed.

In the event, DStv/Multichoice after its initial shock and anger fought back with a range of tactics including a low-cost bouquet. But if competition was good for Pay-TV subscribers, it was less good for GTV’s sprint for growth: the short, sharp campaign which was to have ended in a victory declaration turned into something more like trench warfare.

The longer GTV was in a territory, the better it established itself and its impact on the market was that it took more of the new market growth than its competitor: for example in Uganda, it had 20,000 subscribers. However, the number of markets where it was making demonstrable progress was still relatively small in number. Nevertheless it continued to fundraise and look for ways of increasing its market share. Late in 2008 it announced that it would enter Francophone markets to compete with Canal Plus. But by this time, the financial costs of running an operation that had not yet gone into profit were beginning to bear down on the company.

Its fundraising efforts were taking place in a financial climate that just got steadily worse. In order to stay upright, it made a decision to sell the “cash cow” Gateway Communications to Vodacom for US$700 million. However, this was clearly a sign of desperation as things began to unravel. On the 7th of January 2009, Kinnevik announced that it had sold its stake $23.6 million, a return 1.8 times the amount invested in May 2007. How do you sell a stake in a loss-making company and make that rate of return?

(Kinnevik is owner of the MTG Group which runs Pay TV operations in 24 European countries. On 7 January 2009 it launched Viasat 1, a new Free-To-Air channel in Ghana. It was also rumoured to have expressed interest in becoming a shareholder in new South African Pay TV player, OnDigital

Well reading between some of the fairly clear lines of the different players, the investment that GTV had obtained from different companies was underwritten by its ownership of the profitable Gateway Communications. Once that was sold, investors probably had agreements that allowed them to claim back their investment. A loss-making bank like Citigroup would doubtless also want to exit in order to retrieve whatever funding it could at this stage. Therefore the plan to sell to Canal Plus can be read as a last desperate throw of the dice before facing the inevitable.

Why did GTV fail? Not all of the blame can be laid at the door of the current financial crisis for there are other reasons:

* The “battering ram” of football rights alone was not enough to get DStv/Multichoice customers to peel off quickly enough. GTV started with 12 channels and DStv/Multichoice had 70 video channels and 40 audio channels. Customers might want the Premiership matches but other family members still missed content on its competitor’s bouquets. Indeed, there was some resentment from customers in countries where GTV had not launched about their inability to get their favourite games.

* The sprint for growth strategy was not helped by the lead times needed to deliver set-top boxes. In the early stages, there was a shortage of boxes and it took three months for them to get from the manufacturer to the market. Supply problems of this kind were ironed out but there was a period when there was more demand than supply could meet.

* But these reasons pale into insignificance alongside the biggest reason of all. Wherever you are globally, Pay-TV is a deep pocket business. It should not be forgotten that making a success of BSKyB almost unseated Rupert Murdoch. The extremely expensive core rights that will make a success of the business have to be repurchased every three years and thus far they have only ever gone up in value.

So now that GTV is no more what will happen to the UK Premiership rights? DStv has secured the licence to show the Barclays Premier League Live Package A and will be showing these

matches on SuperSport from this weekend. SuperSport already held both Live Package A & B rights for South Africa and Live Package B rights for the rest of Sub-Saharan Africa and with

this deal has now secured all Premier League live rights for the remainder of the 2008/2009 season and for the whole of next season. The Nigerian rights are still held by Hi-TV.

So where does this leave competition in the Pay-TV market? In the short-term, competition is not in good shape. There are regional players like TV Cabo in the Lusophone markets and Hi-TV in Nigeria. The latter claims 195,000 “activations” with some smaller number actually as paying subscribers. Others like Orange and Wananchi are reliant upon sub-licensing deals from existing rights holders which will mean that the existing large players will have considerable influence. The shame is that GTV’s presence in the market energised individual markets and attracted investor interest in the broadcast sector. It is to be hoped that the pioneers get the arrows and later settlers will get some of the land. But sadly in the short-term, GTV’s passing can only undermine the slowly building credibility of Africa’s broadcast market.