broadband bulls, digital dilemmas: korean cable’s future

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Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE KCTA Cable Convention & Exhibition Jeju June 13, 2006

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Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE. KCTA Cable Convention & Exhibition Jeju June 13, 2006. KOREAN CABLE: AN ANALOG + BB INTERNET STORY TODAY. Subscriber Composition (CYE Dec. 06 forecast). Cable SO Industry Revenue (CYE Dec. 06 forecast). - PowerPoint PPT Presentation

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Page 1: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

KCTA Cable Convention & ExhibitionJeju

June 13, 2006

Page 2: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

Subscriber Composition(CYE Dec. 06 forecast)

Analog SubsDigital Subs

Other

SO Indirectly Owned

SO Directly Owned

0

2

4

6

8

10

12

14(mil.)

TOTAL CATV SUBS TOTAL BB CABLE SUBS

0.00

0.200.40

0.600.80

1.001.20

1.40

1.601.80

2.00(US$ bil.)

Digital CATVAdvertising & otherBroadbandAnalog CATV

Cable SO Industry Revenue(CYE Dec. 06 forecast)

KOREAN CABLE: AN ANALOG + BB INTERNET STORY TODAY

Source: MPA research estimates; KCTA; MIC; KBC

Page 3: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

CABLE’S SHARE OF DIRECT BB SUBS GROWING RAPIDLY AT THE EXPENSE OF KT, HANARO

0

2

4

6

8

10

12

14(%)

2002 2003 2004 2005 2006e

Source: MPA research estimates; KCTA; MIC; KBC

3.3%

5.4%

7.9%

10.3%

12.4%

Cable SO’s Share of Direct BB Subs

Page 4: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

CABLE’S BROADBAND ADVANTAGE… vs RIVAL TECHNOLOGIES• Broadband HFC Cable Two-way distribution pipe

Broadband capacity ~ HFC 750 Mhz+

Upgrade costs low with scale

Ability to offer TRIPLE PLAY, VOD, DVR

Strong HD capability

Superior local sales strength to telcos – key driver of triple play, broadband + digital [key in Japan, Korea, Taiwan, U.S.]

Ability to offer quad play (NTL acquisition of Virgin Mobile, UK; JCOM’s tie up with Willcom in Japan)

• DTH Satellite Offers national reach but lacks two-way return path capability Sky (UK) acquisition of EasyNet BB in the UK; DBS in the U.S. may make

similar moves

• ADSL/VDSL Can offer national reach but dominated by incumbent carriers with conservative mindsets

Lacks infrastructure to offer video without significant investment in technology + content

LLU deregulation often proves futile and unrealistic

• FTTH Highly prohibitive costs and very long payback period Long gestation period

• Mobile/ Wireless Standards for satellite mobile TV and 3G video remain early stage and business models yet to be established

WiBro remains out of reach in the near term

Page 5: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

CABLE’S BROADBAND ADVANTAGE… BUSINESS IMPACT

BROADBAND CABLE HELPS DELIVER THE DIGITAL HOME

FACTInternet + IP-based telephony have helped boost digital cable rollouts in U.S., Canada, Japan, Latin America [Brazil, Chile, Puerto Rico] and Europe [Netherlands, U.K., Hungary]

WHY?Apart from a few niche and premium channels, cable companies have found the largest driver of digital adoption to be bundled high speed Internet, VOIP telephony and VOD/DVR services plus retransmission of HD terrestrial

BROADBAND IS GOOD FOR AN OPERATOR'S HEALTHFACTProfit margins for broadband Internet services are 55% on average globally while digital TPS service margins are 40%+ in some markets

Broadband also contributes on avg 40%-50% to top line growth and approx. 30% to overall turnover

WHY?Cable modem and related BB equipments costs are falling rapidly and helped by tax efficient/low duty frameworks, operators can deploy services at low incremental cost once investment and upgrade to 750 Mhz+ HFC cable is achieved

Page 6: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

Cable TV Market Share(CYE Dec. 06 forecast)

Cable Broadband Market Share(CYE Dec. 06 forecast)

KOREAN CABLE IS CONSOLIDATING RAPIDLY AND WILL CONTINUE TO DO SO WITH MORE DEREGULATION

Source: MPA estimates

Other 17%On Media

4%Qrix4%

CMB8%

HcN9% C&M

15%

CJ CableNet19%

Tbroad24% Tbroad

31%

C&M 22%CJ CableNet

16%

On Media6%

Qrix5%

CMB3%

HcN3%

Other14%

Page 7: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

DIGITAL DILEMMAS

CapEx vs ARPU

Open cable-standard STBs @ US$200-US$250 with scalable rollout (i.e. 1 mil. +) bring cost down to US$150

ARPU for cable TV however only @ US$5-6/mo.; analog pricing capped at US$15/mo; digital @ US$18-US$25

Solutions

Bolster analog pricing ahead of digital rollout with migration of US$3-US$7/mo. subs to US$10-US$15

MIC may bring relief to technology issues with easing of standards

Offer more flexible digital and analog pricing - cable TV is not a utility

••

Page 8: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

DIGITAL DILEMMAS

Content differentiators

Limited differentiation between analog + digital

Ad supported basic channels do not want to migrate solely to digital

Lack of HD content

Continued restrictions on foreign retransmission channels and ownership of local PPs (49%)

Solutions

Ramp up HD terrestrial content output and leverage cable retransmission to boost digital [i.e. Japan scenario]

Differentiate digital product with bundled IP telephony

Accelerate investment in local PPs exclusive to cable

Lift restrictions on foreign retransmission channels and FDI in local PPs

••

Page 9: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

TODAY’S DIGTAL & BROADBAND REALITIES

Analog cable + BB is a high margin biz.

Why go digital when upgrade costs are high

Content is lacking and pricing flexibility is restricted

Facilities-based regulation on cable SOs may limit ability to compete on price

Impact margins/costs with mandatory QoS, interconnection, backbone fees

••••

Page 10: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

THE POTENTIAL REGULATORY FRAMEWORK?

Timing

PM Task Force recommendations ready by Q4 06

IPTV licensing by March 07

Convergence framework (Ofcom or FCC Model) is uncertain

IPTV Licenses

KT

Hanaro

Powercomm/Dacom

Will nationwide transmission be allowed?

Yes, as this will be KT’s key differentiator and the cap for Sos will re revised to 1/3 of all subs - 33% approx. as in Taiwan currently

•••

•••

Page 11: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

THE POTENTIAL REGULATORY FRAMEWORK?

Bundling  

Regulation may limit the ability of KT, in particular, in its provisioning of IPTV video packaged with Internet, phone and other services 

Price restrictions on IPTV  

W18K - W24K as in digital CATV; will not pressure or distort the market again by competing with analog cable pricing

Terrestrial retransmission  

KBC/MIC taking the view that retransmission of digital terrestrial and HD terrestrial must be allowed over all networks - cable, satellite and IP - in order to achieve the digital goal (as in Japan) and accelerate HD broadcasting after 2008 

Programming and Program Access

Potential regulation of vertically integrated cable media (CJ, On Media, T broad, C&M)

Potential enforcement of program access rules (a la FCC in the U.S. - vertically

integrated cable media groups have to make their content available to cable’s competitors with non-discriminatory terms)

Page 12: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

KT’S IPTV PLANS

FY 06: W300 bil. invested with FTTH @ W250 bil. and IPTV @ W50 bil.

FY 06: Digital content fund ~ W95 bil.

FTTH will be avail. only to only 200K sub HH with 06, implying inflated capEX costs of approx. US$ 1,250/sub for FTTH with all B&W

Nationwide expansion is expected to take 5 years and will prove problematic in terms of capEx burden

KT hoping to leverage full fibre optic network to offer high quality BB, WiBro, IPTV and BcN

••

Infrastructure CapEx

Page 13: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

KT’S IPTV PLANS

VDSL/LAN ready for IPTV ~ 25% of KT’s BB sub base (base case ~ 900K subs)

FYE Dec. 2006 – 40% of its BB sub base at 4 Mbps

MPA: KT will launch in 2007 to 40% at 2 – 4 Mbps: SDTV channels + VOD in Seoul

Gradual migration to 8-10 Mbps, more capEx [By way of comparison, 95% of PCCW’s network in HK is upgraded to 6 Mbps and 60% to 8 Mbps – upgrade to 25 Mbps is planned in the next 2 yrs]

IPTV equipment at US$180 – US$200 with STBs at US$150 – US$170; CA+M/W+EPG+ SMART CARD = US$25 ~US$28

350K – 400K STBs order for Q1 07 with capEx at approx. US$50-US$60 mil.

In consideration: Sky Life STB (MDU, dev. By Thomson) with IP tuner (US$100…allows retransmission of SkyLife content)

••

Infrastructure Equipment

Page 14: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

KT’S IPTV PLANS: CONTENT REMAINS THE KEY ISSUE

W30 bil. invested in Sidus FNH

W95 bil. for digital content investment

Terrestrial retransmission and HD terrestrial (will get, but HD terrestrial

production in Korea is really low at pres.)

Acquiring content from studios/ libraries to program its own channels but lacks expertise in programming plus is unwilling to sign output deals with studios or MG agreements

PPs – has been in talks with On Media and CJ Media but can’t get anything signed because of cable affiliation plus KT will not offer attractive MG agreements than could persuade it to share content

Foreign retransmission and foreign invested local PPs [Turner, Sony, News Corp./Fox] are just eyeing local ad-driven cable PP JVs or straight per sub agreements with cable

•••

Infrastructure Content Plans

Page 15: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

HANARO’S IPTV PLANS

Hanaro is increasingly the subject of M&A talk (SKT, LG Gp. Etc)

Low cost strategy for IPTV and its decision to go ahead with a portal launch in 06 is all part of a sale strategy though, at the same time, it may help neutralize cable’s BB advantage.

Key focus is on a service it calls TV portal [Hanaro Media] – to launch in July 06 using a Celrun IP STB solution (in which Hanaro has invested W6 bil. in equity – total at W18 bil), dedicated to VOD services with content ranging from movies, dramas etc

2 Mbps speed (transmitted online via Celrun HDD STB)

Will also provide terrestrial channels (real time) by installing antenna into consumer STBs.

Negotiating with 30-40 media owners for content and says it has signed up CJ, SBS, EBS, BBC, YTN, MBN, NGC etc.

Service will cost W9K/mo. plus STB rental fees @ W3K with 30% discount to existing BB subs. Looking to lower BB churn through the service and recover BB mkt share plus boost overall BB ARPU.

Revenue targeted at W5 bil. in 06; W70-W80 bil. in 07 and W200 bil. in 2008 when it expects to launch a full IPTV service.

••

••

Page 16: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

APPENDIX

Page 17: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

CABLE COMPANIES, SUPPORTED BY STRONG REGULATORY AND COMMERCIAL DYNAMICS, HAVE TRANSFORMED INTO MAJOR BROADBAND TELECOM PROVIDERS

Selected Leading Broadband Cable Operators (Subscriber data in mil.)

Y/E Dec. 2005 - Q1 2006 (Source: Company Data, MPA research estimates)

Company Market Analog Video Digital Video Internet Telephony

Comcast USA 11.66 9.79 8.52 1.3

Time Warner Cable USA 8.90 4.64 4.15 0.9

Cox USA 3.60 2.70 3.14 1.6

NTL/Telewest UK 0.61 2.70 2.83 4.32

Charter USA 3.05 2.80 2.20 0.12

UnitedGlobalCom Europe 9.36 1.01 1.97 0.86

Adelphia USA 2.99 2.01 1.71 NM

Cablevision USA 1.07 1.96 1.69 0.74

Shaw Canada 1.37 0.80 1.40 0.12

Rodgers Canada 1.30 0.97 1.18 0.10

Tbroad Korea 3.20 NM 0.70 NM

J:COM Japan 1.01 0.70 0.95 1.01

CJ CableNet Korea 2.00 0.05 0.40 NM

C&M Korea 2.00 NM 0.54 NM

EMC Taiwan 1.03 0.05 0.17 0.10

TBC Taiwan 0.65 0.02 0.10 0.03

i-CABLE Hong Kong NM 0.74 0.32 0.12

StarHub Singapore 0.25 0.20 0.28 0.01

Page 18: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

GLOBALLY, DSL IS A DRIVER OF BROADBAND BUT IN MARKETS WHERE CABLE TV HAS A CRITICAL MASS, CABLE IS A MAJOR BROADBAND CONTRIBUTOR

Y/E Dec. 2005 (Source: MPA research estimates)

Global Broadband Breakdown by Technology

DSL, 65%

Cable Modem, 25%

Other, 1%FTTx, 9%

0%

10%20%

30%40%

50%60%

70%80%

90%

Korea

U.S.A

.

Canada

Singap

oreChina U.K

.

Japa

n

Austra

lia

Cable TV Pen./TVHH Cable BB Pen./HH

Y/E Dec. 2005 (Source: Point Topic, Morgan Stanley, MPA research estimates)

Leading Cable TV/Cable Broadband Markets by Penetration

Y/E Dec. 2005 (Source: Point Topic, Morgan Stanley, MPA research estimates)

Cable/DSL & Other Composition in Leading Broadband Markets by Penetration

0.05.0

10.015.020.025.030.035.040.045.0

U.S.A

.China

Japa

nKore

aU.K

.

Canada

Austra

lia

Singap

ore

Cable Modem DSL & Other

Page 19: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

BROADBAND IS BECOMING A MAJOR DRIVER OF GLOBAL ECONOMIES AND KOREA IS LEADING THE WAY

Broadband Sector as a % of GDP

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

Korea Taiwan USA HongKong

Japan China UK Brazil India

Y/E Dec. 2005 (Source: MPA research estimates)

Page 20: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

KOREA STILL HAS BROADBAND LEADERSHIP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Korea

Hong K

ong

Taiwan

Japa

n

United K

ingdom

Singap

ore

United S

tates

Austra

liaChina

Brazil

Thaila

nd

Philipp

ines

India

Global Broadband Penetration - Total Subscribers

Broadband Penetration - Density Per 100 Inhabitants

Y/E Dec. 2005 (Source: MPA research estimates) Y/E Dec. 2005 (Source: MPA research estimates)

Tota

l Sub

scrib

ers

(mil.

)

Den

sity

Per

100

Inha

bita

nts

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

United S

tates

ChinaJa

pan

Korea

United K

ingdom

Taiwan

Brazil

Austra

lia

Hong K

ongInd

ia

Singap

ore

Thaila

nd

Philipp

ines

Page 21: Broadband Bulls, Digital Dilemmas: KOREAN CABLE’S FUTURE

THANK YOU