|Building the Infoway
Pay-TV in Brazil is facing difficulties. The industry has already installed more than 50,000 kilometers of high capacity Hybrid Fiber Coaxial networks at a cost of more than US$ 1 billion. This network could play a crucial role in building a Brazilian Infohighway, but high taxes and limited local content has slowed the growth of the subscriber base making it difficult to find funds to properly expand the system. A new model for the industry and new regulations are needed.
Telexpo 2002 is announcing that the wonderful world of convergence has arrived. Panels devoted to e-learning and tele-medicine show revolutionary applications which have either already been implemented or will soon be very easy to attain. For these, Brazil has a privileged position. The structural changes brought about by the telecommunications privatization process have decisively accelerated infrastructure implementation, which is of paramount importance to convergence. Today, Pay-TV operators are building thousands of kilometers of coaxial and optical fiber cables, and implementing a wide-reaching wireless network using satellites and MMDS (Multichannel Multipoint Distribution System). The underdeveloped Brazilian telecommunications infrastructure was rapidly expanded after the privatization of its telephone system, putting Brazil, at least in its major population centers, on the level of many advanced countries. More than 270 cities are already served by HFC (Hybrid Fiber Coaxial) networks with a bandwidth of at least 500 MHz. The networks now total more than 50.000 km, and cost more U$ 1 billion to build. These networks offer many megabits per second of bandwidth for Internet, data, voice or VOD (video on demand). That is to say that Brazil is now very well positioned from both technical and technological points of view,. In order to speed up this process and enable Brazil to integrate, in due course, the special group of nations that are prepared for the 21st century’s economy and markets, it is fundamental to ensure that the capillarization of this structure be as broad as possible. Pay-TV, due to its extensive reach, despite having a long way yet to go, will play a very important role. Today, there are nearly 3.5 million subscribers and close to 14 million viewers (cable, MMDS and DTH – Direct to Home) in Brazil, well below the initial estimates. Until there is substantial growth of the subscriber base, continued investment in the expansion of the network is not economically justifiable. The challenge is to understand why is this happening and what measures should be taken to overcome this situation. The most important tool for broadening coverage is still Pay-TV because of the content it delivers to the home. The average Brazilian is addicted to TV. The time, the number of hours, the Brazilian viewer spends in front of a TV screen is among the highest in the world. This viewer involvement is a result of the high quality programming provided by “open” TV. A good example is the local soap opera, the Brazilian novela, which is extremely popular not only in Brazil, but also in parts of Europe, Asia and Latin America. At first sight, it would seem that the lower than expected penetration of Pay-TV is due to its price. Studies have shown that penetration among higher class purchasers is reasonable – 70% for class A (Brazil’s highest socio-economic category), but class B penetration is only 23%. Penetration of Class C, which accounts for the bulk of Brazil’s viewers, is less than 5%. Although the average subscription fee is only about U$ 20, not very high by world standards, it is more than the average lower economic class viewer is willing, or able, to pay. The great villain responsible for the high prices is the tax burden. Unquestionably, prices would be more affordable prices if the huge tributary burden levied on the Pay-TV sector were reduced. The sector already pays a wide variety of taxes and, or so it seem, new taxes are invented every moment. Some taxes have noble intentions, for example, the fund for the universalisation of telecommunications or taxes to foster Brazilian-produced movies. Others, such as the taxes on soil utilization or on rights-of-way are extortive and confiscatory. Together, they add up to an unbearable burden for the consumer to carry. It should be noted that none of these taxes existed when the companies began to build the info way. Consequently, their initial business plans had to be radically changed. Today, squeezed between the government’s demands for revenue and consumer inability to pay, the Pay-TV sector finds it increasingly difficult to generate a return on investment. The question of price cannot be discussed without taking into account the cost of quality programming Pay-TV operators need to attract viewers. Programming costs can be reduced, cheaper or fewer shows can be offered to subscribers, rates might even be reduced this way, but without attractive programming, penetration will grow slowly, if at all, or might even fall. In 1992, when Pay-TV started operating in Brazil, operators bought programming from the most famous, internationally renowned, sources: HBO, CNN, ESPN, Discovery, Cartoon Networks, FOX, Sony and many others. Acceptance of this content was immediate; it was an important option for the better educated, higher cultural level, public. As time passed programmers invested in customizing their programming, but the resulting programming was still aimed at the same relatively sophisticated, internationally oriented, public. After all, news programs in English, Spanish or German and baseball games are not exactly adequate for the great majority of Brazil’s consuming public. Pay-TV, with rare and honorable exceptions, does not yet have “Brazilian” content, that is content aimed at attracting the average Brazilian viewer. This is obviously the result of a “” chicken vs. the egg “” situation: the subscriber base does not grow because of the lack of adequate programming, but without a critical mass of subscribers you cannot generate the funds to invest in programming. We are facing, then, two difficult impediments to the growth of Pay-TV: the onerous tributary burden and inadequately targeted programming. The impact of these two obstacles, however, is not limited just to slowing the growth of Pay-TV in Brazil. They also have a significant impact upon the building, expansion and development of the networks themselves and, consequently, upon the implementation of the Brazilian Infoway. Several years ago, Al Gore, then the US vice president, urged Americans to invest in the Information Superhighway. The goal, the vision as he saw it, was to build a vast data communications infrastructure which would reach into every American home and provide all American citizens with ample access to information. The plan called for American Pay-TV operators to invest in remodeling and up-grading their plants to make them …. exactly like the ones we are building in Brazil! Reducing the impediments to Brazilian Pay-TV expansion would be an important step towards the modernization of the country itself. These problems, however, cannot be solved by decree. They demand a broad and deep review of the business model, itself, that rules Brazilian Pay-TV market. The various players in this market can be classified, roughly, as Content Producers, Content Distributors and Owners of the Means of Distribution. Each one of these activities can be considered a business in, and of, itself. Although they are closely correlated, these activities demand completely distinctive company profiles. Content Producers are big and small studios, the Open TV networks, the community and university channels, in short, the full range of entities dedicated to producing programs for a broad array of audiences. Their essential activity is creation. Content Distributors, on the other hand, are commercial organizations that buys products (Programming) wholesale, to sell retail. Their essential activity is trade (sales, money collection, services provision). Owners of the Means of Distribution are those who build, maintain and manage the infrastructure. Their essential activity is to optimize the building and use of networks and sell network transmission capacity to service providers of all types. In Brazil, all these activities have been mixed together. Typically, the Brazilian business model has led the content producer to develop its own distribution organization and to build its own infrastructure. Such verticalization ruins efficiency and worse, distorts results. There is much talk, and many questions, about what will happen when the Brazilian telecommunications sector becomes totally liberalized: are telephone companies going to offer TV and TV companies offer telephony? obviously not. The essential activities, the core businesses, of each are quite different. Significant partnering between companies which offer telephones and companies which offer video entertainment, however, is quite likely. Nevertheless, it will be “every jack to his trade.” To believe that those who know how to do one thing also know how to do another, is to make the same mistake that led to the vertical model described above. The conclusion to be drawn from this is that the “New Model” must, of necessity, contemplate the real interests, and capabilities, of each of the players. The current model needs to be reviewed by all those involved in the Pay-TV business: the programmers, operators, suppliers and, importantly,Anatel – Brazil’s telecommunications regulatory agency. Until now, Anatel has disregarded the fact that Pay-TV networks carry content. Anatel´s view has always been that the bits and bytes which run in the networks are all the same. This view ignores the impact of content upon the lives of people – of the importance of content to society. It is not possible to review, to re-discuss, the Pay-TV business model without considering the fundamental role played by content. Conclusion Understanding the need to rollout a broadband infrastructure to facilitate the development of the Information Society depends, necessarily, upon accepting that content is the key to increased market penetration and funding for the expansion of the infrastructure. Fortunately, the discussion about a new model has already begun in Brazil; it will certainly be followed closely in several other Latin American countries that face similar challenges constructing their own Infoways.