Saturday, August 18, 2012

Astro's IPO: Primetime still?

Imagine 10 - 15 years ago, what was your most viewed screen? TV? PC for work and some surfing? How about today? How many active screens do you own? Mobile (smart), tablet (iPad probably), notebook with built in wifi (whole lot of apps for video viewing, blog reading, stock charting, facebook-ing?), then your TV screen. In my house, for example I have some 6 active screens in total (2 TVs, 2 PCs, 1 tablet and 1 mobile).

With that, the biggest question for Astro in the future is how to grab that eyeballs from Malaysians as much as it can. The question is can Astro with the tonnes of content it is creating and to some extent have exclusive rights in some premium content, would it be able to grab your attention. Would more people be shifting from watching Astro's TV to reading my blog for example, or me spending time blogging rather than watching Astro's content? How would YouTube's premium content strategy turn out to be? Will YouTube be a competition to Astro? How about Apple's TV strategy?

Even TV is changing

One of the biggest question now is whether Apple coming out with "iTV"? The fact of the matter whether Apple is coming with TV or not is actually not important. The more important fact is that SmartTV is here to stay and grabbing market share from the more traditional TVs. Apple's iTV is about SmartTV, only thing is how are they going to make it smarter as in the iPhones for mobile and iPads for tablets. If SmartTV is here to stay, and with capabilities of viewing youtube, international channels not related to Astro and other hosts of applications now being made available from your PC to your TV screen, it is going to be bad news for Astro. They will lose their share of your eyeballs.

Will Astro with a whole lot of highly paid and smart people be able to address that problem? Its competitors - Google, Apple, Samsung have very highly paid (and smart) people as well. Much higher in fact. And these guys are thinking of getting into TV and content. (Yes, Astro's competition may not just be Media Prima and RTM but people like Larry Page, Sergey Brin, Tim Cook, even Microsoft's Steve Ballmer - am I over speculating? I am not.)


Heard of Netflix? The top darling stock in US for 2011 (of course it came down later while its strategy has proven to be a threat). It is basically a company that aggregates content - be it movies, dramas, series, - new or old - and bringing them to your living room. Their charging model is via per movie purchased or monthly subscription. Hence, households will have a huge library of content available in their living room, and they can watch it by paying a minimum sum whenever they want to watch them. The more they watch the more they pay - basically On Demand.

Of course, over here in Malaysia, this Netflix model is a bigger threat to the pirated DVD dwellers than Astro for now. But imagine you can pick and watch whatever you want anytime you want - that is OnDemand TV already here right now. YouTube can do that too. The biggest challenge right now for this things to be here, in Malaysia is licensing.

Can Astro do what Netflix is doing? As a predominant Satellite TV provider - difficult, as technologically it faces a challenge. What netflix does is it does not care which "platform" you are watching your TV on, you can basically get a USD50 set top box (STB) from any shop out there, pre-downloaded with Netfllix and watch. From there, the content will reach any home which has STBs that supports Netflix. (Most homes in US has that.)

While Netflix may not be here, what may happen are operators with Netflix model may be here and again these are potential threats to Astro in terms of grabbing your eyeballs.

Current challenges to Astro

What has been said above are potential threats to Astro - although, it may or may not be here, yet. The single biggest challenge to Astro NOW is the challenge with content costs and increasing the Average Revenue Per User (ARPU). If you see below, it may seem to be that they can pass the costs to the users as it seems that they have been able to grow the ARPU from RM82 in 2010 to RM91 in 30 Apr 2012.

How high more can this continue? Above RM100? While the actual data may not be available, let's face it - my experience in Astro being able to increase its ARPU is not by providing better and more content to the household, but by increasing its charges. The amount of content that I get from Astro is still the same or lesser in fact but over the last few years it has repackaged their pricing to squeeze more dollars from its subscribers.

Again the question is how much content do we really need. Yes, Astro is smart to repackage content so that we may need CNBC, Sports, History Channel and other useless channels which I do not watch - repriced them yearly so that we will be paying more, but this is to backfire if it does this too many times.

It already has 50% market share on the households in Malaysia. Anything more would be getting tougher as there is a percentage who would not bother or just cannot afford. Look below, it manages to increase less than 200,000 subscribers over the 2 years, still a decent sum but already it is showing a slow down in terms of getting new subscribers.

However, I would feel that the bigger challenge in the long run is to reduce its churn. While this may not seemed to be, based on the above current numbers, it will be a challenge over the long run.

How come?

- Monopolistic environment - besides what are already mentioned above, one thing that people do not realize is that Astro has been pretty much operating off a "monopolistic" environment. Astro is the only 1 operator who is able to offer satellite TV, and Ananda is smart to be able to expand this advantage fast to be able to control premium content deliveries in Malaysia. Astro now has exclusivities over ESPN, Star Sports, EPL, CNN, CNBC (basically the premium content that most Malaysians until now are not able to live without). Will that change is a question?

It may, it may not. The most recent example where Live Olympics content was already available off YouTube (owned by Google) is already an example. You can basically watch Olympics live on Youtube as in what we get from Astro. Google is a USD250 billion behemoth, and I am sure this is just the beginning. If Apple is going into offering content through TV, I am (carefully) sure things like this will be here as well, or much more.

Yes, we may say the content owners may have different ideas but content delivery partners to these guys are equally important and these giant of companies have a lot of power and money to make statements. Movie content guys are facing some of the threat that the music industries were facing since the days of Napster.

Hence, that monopolistic situation may even be cancelled out, even with the Malaysian government fully behind Astro. Content may have just gone borderless with the advent of YouTube.

- younger generations - again, more and more eyeballs have gone to tablets, phones, notebooks and other screens and moved away from TV in the last 5 years. Hows that going to translate to Astro getting more of your time? They may be able to continue to charge you subscription and increase them. But don't you think over time, we will not be that naive anymore? - paying for something which we use lesser and lesser.

- costs - at last, I am going to show the financials. Look at the revenue growth - great. But look at the PAT growth as well. In fact, for the most recent quarter, its PAT deteriorated (from RM196 million to RM123 million - 30 April 2012 quarter). How is this?

It is basically spending more to deliver content to us - either by way of purchasing them or making (producing) them. Over the years, premium content are getting much much more expensive. This is why much watched "Live" content such as EPL, NBA, Olympics are getting "record-breaking" bids. This is also why content such "American Idol" is getting value - that is if you are able to produce them well. Nothing beats live content nowadays. Beyond live content, their value deteriorates due to "On Demand" technology. And this is why strategies like Netflix's will thrive in the future. Not Astro's as it does not have the delivery mechanism to do this - besides Beyond IPTV. Who has? Actually, Telekom Malaysia through HyppTV's IPTV (but TM currently does such a bad job in this - they will learn but this is a story for another day.)

Why are Astro's other expenses higher besides the costs of sales? It has to concentrate to make more localize content of its own. And it has to spend more on getting better and newer technologies to deliver the content to your home - better Set Top boxes (the PVR, HD), having more satellites to deliver High Definitions content. However the platform that it is using is just too much a challenge against the one that TM is having - fiber.

Another potential reason for the higher revenue and ARPU could be due to the sale of broadband. Started few years ago, Astro has tied up with Time Dotcom to offer Astro Beyond IPTV. Part of the package offered for Beyond IPTV is broadband (minimum price package I think is RM138 for a 3MB broadband). Hence, if it is recognizing revenue from broadband, for sure its revenue and ARPU is going to be higher. So will the costs of sales be. Hence probably from there, that's the reason we are not able to see higher profitability despite the higher revenue.

It seems that the journey Astro is going to have is getting more and more challenging. It is just facing competition from many angles.

At RM15 billion market valuation it is trying to ask for from us, is it worth it? Would you pay 24xPE (2012's Net Profit) for so many things unanswered? But yet again, since Khazanah is there, EPF is potentially going to be there as well. And from there, Astro may get some premium - but for how long with all these questions? Yet again, it may promise all the dividends in the world - and when we hear things like this we get excited.

Anyway, there aren't much for those who would like to apply through the usual balloting. See below.

Read my other article on Astro's IPO.

Astro IPO: How delisting and relisting may create additional RM6.5 billion from the market


Chin-Fun said...
This comment has been removed by a blog administrator.
Chin-Fun said...

may i ask how did you get the 24X PE? I couldn't get it in my calculation .. pls share. If it is too private email me please? TQ

felicity said...

Hi Chin Fun

Market Cap assuming is RM15B
Net Profit for FY2012 was RM629M
Historical PE = RM15,000M/629M

= 23.84x

However, the market cap is still yet to be determined as the price is yet to be fixed. Minority watchdogs mentioned even higher i.e. RM18B