Why MultiChoice is throwing in its lot with Netflix

In perhaps one of the biggest about-turns in recent corporate history, pay-TV operator MultiChoice has signed a distribution deal with Amazon Prime Video and Netflix.

These were once considered its arch-rivals. "Not so long ago the company appeared to view itself as a competitor to the likes of Netflix and Amazon Prime Video," says Tefo Mohapi, technology analyst and CEO of iAfrikan Digital.

Certainly, in 2018 MultiChoice CEO Calvo Mawela was vocal about how Netflix was able to scoop more than 100,000 subscribers, without having to play by the same rules as local pay-TV operators.

"They do not pay a cent in this country for tax. They do not pay income tax," he said. He also bemoaned the fact that whereas SA’s regulator, Icasa, had called on pay-TV players to share their content with third-party platforms, Netflix was not under the same strictures.

"That gives them a nice advantage in capturing the audience," Mawela said. "[Icasa is] strangling us more and more, while giving them free rein."

Still, if you can’t beat them, it seems, join them.

Netflix has also been making inroads on the continent — which MultiChoice views as its growth market, having invested in original series in countries like Nigeria and Kenya as well as SA’s Queen Sono and Blood & Water.

The news — full details of which are yet to be released — overshadowed all other issues on an investor call this past week, including the declaration of MultiChoice’s first annual dividend since listing, worth R2.5bn for the year to end-March.

Keeping subscribers on its platforms is probably the main driver for the new partnership, say analysts.

The DStv operator was able to add 500,000 subscribers to its base in SA during the year, growing the total to 8.4-million. Overall, its customers grew 5%, or 900,000, to 19.5-million households.

So what is MultiChoice’s streaming strategy?

In addition to the new deal, which will give DStv customers access to content from the US-based operators, the group has DStv Now, which is tied to a traditional satellite subscription. It also has its own standalone streaming-only platform, Showmax, which now offers some live channels.

Mawela tells the FM the company has plans for a version of DStv Now that will not be tied to a satellite subscription.

MultiChoice finance chief Tim Jacobs says that because of the mix of subscribers at different income levels in SA and the rest of Africa some still see value in satellite television whereas others favour the online option. This means MultiChoice has to "straddle the two worlds".

Either way, Africa’s largest pay-TV operator seems to have accepted that online video on demand is here to stay and will be where it needs to grow.

According to data from Digital TV Research, penetration for over-the-top (OTT) streaming players like Netflix is still at a mere 4% in Africa compared with 82% in North America, 69% in Western Europe, 34% in Latin America and 37% in the emerging markets of the Asia Pacific region.

Renier de Bruyn, a senior equity research analyst at Sanlam Private Wealth, says the conclusion of a distribution agreement with Amazon Prime Video and Netflix "is an interesting development".

"Some investors were concerned about the potential threat from OTT players to MultiChoice’s business model," he says.

"But it is becoming clear that the low penetration of affordable broadband in Africa and the relatively small size of the markets in an international context make MultiChoice a good distribution partner for international content providers across the continent."

But, says Mohapi: "Let’s not be deceived — MultiChoice’s latest strategy of becoming a video content aggregator sounds like something a company worried about its future would plan."

Mohapi highlights the fact that consumers can still pay for one of the streaming services, plus internet access — which can be used for other purposes — for less money combined than DStv’s premium offering costs.

Bright Khumalo, a portfolio manager and analyst at Vestact Asset Management, says this partnership "is not a novel idea", as similar deals have been struck with Netflix by bundle providers like Sky UK and France’s Canal+.

However, he is optimistic that MultiChoice’s size and technical prowess will help it succeed.

"MultiChoice is a mature business with a unique offering in a growing market. We like its positioning in the continent, and we still think it is the king of content across Africa.

"It’s going to take more than Queen Sono to dethrone the king," he says.

Last week, MultiChoice reported a 3% rise in full-year revenue to R51.4bn, including R42.8bn in subscription revenue, which increased 4% year on year.

Core headline earnings rose 38% to R2.5bn, with free cash flow jumping 59% to R5.2bn, driven mainly by an improvement in the trading results from its operations in the rest of Africa, tight cost control and a drop in working capital.

Looking to the current financial year, Ian Woodley, an analyst at Old Mutual Equities, says subscribers generally will have suffered from the slowdown in economic activity caused by the Covid-19 pandemic.

"This will make for an interesting year with regard to pricing, as the company will want to grow, or at least retain, its subscriber base."

What’s more, the economic effect a world slowdown will have on various economies in Africa, especially economies exposed to the oil price, will give MultiChoice some currency issues to deal with, he says.

While losses in MultiChoice’s rest-of-Africa business narrowed by 22%, the total is still steep at R2.9bn.

But Naspers’s former pay-TV prodigy says it’s in a strong financial position to weather the Covid-19 storm, having access to R10.2bn in cash and debt.

The market appears to agree; MultiChoice shares jumped 8% on the day of its results, though year to date they are down about 12%.

Despite repeated requests for information much still remains unclear about how the streaming partnership will work. Will the additional content be added to existing bouquets? Will a new bouquet have to be created? How does this affect pricing at DStv?

For now Mawela says the new offering will not be available on current hardware.

Customers will have to get an upcoming version of the DStv Explorer decoder.

What is clear is that MultiChoice will keep straddling the two worlds — dominating the realm of pay-TV as it has done for more than two decades while trying to do the same in the online streaming space.