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Getting a Kick in Latin America

9 Jun, 2014 By: Erik Gruenwedel

With World Cup soccer taking place in Brazil over the next two months (beginning June 12), the Latin America home entertainment market (including pay-TV) is looking for the quadrennial sporting event to jumpstart digital distribution and put a further dent in longrunning video piracy.

“After the World Cup, we expect to see a massive uptick in terms of consumer spending on content,” said IHS video analyst Richard Cooper. “Brazilians, having bought those TVs, and consumers in those [soccer-crazy] countries will be looking for more home entertainment.”

Still, the industry must contend with a region plagued by piracy.

“The biggest challenge facing home entertainment in Latin America is converting physical piracy into digital spending,” Cooper said.

The Office of the United States Trade Representative, in its April report on intellectual property theft — notably movies and music — cited Argentina, Venezuela, Brazil, Mexico, Costa Rica and Peru on its list of “priority” and “watch list” countries.

Brazil and Mexico together represent about $500 million annually in pirated DVD movies, including $140 million from Brazil and $360 million from Mexico. Much like its Latin American counterparts, high levels of piracy also plague Argentina, according to IHS.

Indeed, the legitimate video market in Argentina accounted for a mere 5% of total consumer spending across the three territories in 2013, including Brazil and Mexico. Still, the video market in Argentina is also declining at a slower rate than several more established video markets in Europe.

Income Heats Up in Brazil

One of the best bulwarks against video piracy in Latin America is an expanding middle class. In the past 10 years, 50 million people in Latin America have joined that economic group. A third of all families (with two children) are now considered middle class with a household income of around $73,000, according to U.S. Media Consulting. The rise in socio-economic status helps consumers move toward legitimate video spending, according to Cooper.

At the center of Latin America’s economic surge is Brazil — host of the 32-nation World Cup, the 2016 Summer Olympic Games, and ground zero for Netflix’s South American operations launch in 2011.

Packaged media in the country had its heyday about the same time of the SVOD pioneer’s arrival, as higher commodity prices contributed to the appreciation of the Brazilian real. Indeed, Brazilians’ purchasing power increased — as did per-capita GDP, from $3,700 in 2000 to $12,400 in 2011 — reinforcing domestic demand, according to AmericasQuarterly.org.

As a result, the Brazilian home entertainment business tops other Latin America countries with a yearly market cap of about 25 billion real ($11.1 billion), of which pay-TV accounts for 90% ($9.9 billion). The home entertainment market ($1.2 billion in spending) is predominantly discs (60% to 80%), as household penetration of DVD players is high, according to IHS.

“As a result, the relatively small physical market in Brazil outweighs the nascent digital services,” Cooper said.

Mexicans Say ‘Te Amo’ Rental

Mexico’s disproportionate share of video piracy in Latin America is evidence of ongoing consumer demand for inexpensive entertainment, and rental in part satisfies that need.

In January, as Dish Network was shuttering remaining corporate-owned Blockbuster stores in the United States, it sold the 300-store Blockbuster Mexico operation — including 1.6 million store-based subscribers — to Grupo Elektra SAB, a retail conglomerate, for $31 million.

While Redbox kiosks gobbled up Blockbuster’s physical rental business in the United States, in Mexico the brand and business of renting movies and video games continues to resonate at the chain’s former stores, according to Juan Elizalde, an analyst at Banco Ve Por Mas SA.

Blockbuster Mexico rented more than 5 million discs, generating $179 million in revenue in 2013.

“[Grupo Elektra] is seeing potential in the client base and the value of the brand,” Elizalde told Bloomberg. “The stores in Mexico haven’t had the same problems. They still generate cash flow. It’s attractive.”

In addition, Elektra is using Blockbuster stores as public traffic points for its financial services business unit. The move mirrors a retail strategy for a wireless telecom business that Dish tried but failed to get off the ground at its U.S. Blockbuster stores.

“Adding Blockbuster gives Elektra a new dimension in a higher market segment that we haven’t focused on before,” Luis Niño, president of Elektra’s Banco Azteca division, said in a statement. “We want to offer them the possibility to buy new products and access their banking information online.”

A Ripening Market for Digital

Latin America has the fastest growing Internet population, increasing 12% to more than 147 million unique visitors in 2013, according to comScore. Consumers spend 10 hours online per month on social networking sites, double the global average time. And five of the top 10 most engaged markets with social content worldwide are located in Latin America.

Brazil has the largest audience (68 million) for online videos in Latin America — a tally larger than the Internet audiences of Mexico and Argentina combined, according to comScore.

Indeed, about 11.5 million online videos are watched every month in Argentina, Brazil, Chile and Mexico. Online video consumption has the deepest penetration in Argentina, followed by Chile (92% of the online population), Brazil (84%) and Mexico (81%).

About 172 online videos a month are watched by Chileans, while Mexicans watch 155 per month, Brazilians watch 125 per month and Argentines watch 117 per month.

Broadband and in-home video will be the principal drivers of a projected 11.2% increase in annual Latin America consumer media spending in 2014 — a tally that is expected to top $70.5 billion, according to the McKinsey & Co. Global Media Report.

Netflix Gets Back in Step

While Netflix’s three-year odyssey into Brazil appears to be blooming, it wasn’t so rosy at first. Among the factors undermining Netflix’s push south of the border were the country’s low consumer adoption of credit card transactions and a streaming catalog heavily dominated by U.S. content.

“I think one of the things that burned Netflix initially was the fact that when you look at TV content in Brazil, it really is focused on local fare — much more than U.S. movies or TV shows,” Cooper said.

The IHS analyst said Netflix remedied the situation when launching service in the Nordic countries — opting for more local content than Hollywood movies.

“[Brazil] really was a learning experience for Netflix,” Cooper said.

In an effort to mitigate potential declines in streaming traffic during the World Cup, Netflix has aggressively upped its marketing spend. It was the largest online display advertiser in Brazil and Mexico in 2013 with 2.7 billion and 463 million ad impressions delivered monthly, respectively, according to comScore.

Netflix has begun streaming the documentary The Goal of Life, showcasing the fortunes of three Brazilian players, one of whom, Santos, is playing on the national team.

"The Goal of Life comes to Netflix at the right time — just before the start of the World Cup,” Jessica Rodriguez, VP of content at Netflix Latin America, said in a statement.

The SVOD service also greenlighted its first Spanish-language original series, a 2015 comedy based around professional soccer in Mexico.

Mexican-based Grupo Televisa — the biggest producer of Spanish-language TV content — is in negotiations to develop exclusive programing for Netflix, Jose Baston, Televisa’s president of television and content, told analysts in a fiscal call last month.

Netflix isn’t the only SVOD service available in Latin America. Since Netflix’s arrival, regional telecoms and broadcasters have rolled out streaming services featuring indigenous content.

In addition to Axtel TV, Clarovideo (América Móvil), TotalMovie (Salinas Group) and Walmart’s Vudu.com, Mexican movie theater operator Cinépolis last summer bowed Klic — a $7.30 monthly movie (no TV shows) streaming and transaction VOD service.

“Broadband penetration is increasing every year, and we see good demand from people seeking to watch movies online," Alejandro Ramírez, Cinépolis’ director said in a statement. "It's an investment in the future. We know the first few years won't be as successful and there will be moderate growth, but as broadband penetration grows across the country, we'll have a great opportunity.”

Meanwhile, Televisa bowed Veo — a subscription streaming, transactional VOD and TV Everywhere platform featuring indigenous content marketed as a value-add to cable subscribers. Unlike Netflix, it adds the service charge to the monthly cable bill.

Another content provider to Televisa and Netflix in Latin America is Lionsgate. The mini-major in 2010 formed Pantelion Films to produce and distribute movies and TV programing in Latin America and the U.S. Hispanic market. Original programing includes a TV series based on the movie From Prada to Nada, in addition to “Terminales” for ABC Family.

“Latin America has become a major market for us,” CEO Jon Feltheimer said in an interview with WorldScreen.com. “With distribution partners like IDC, Televisa and Netflix for our content, we’re now generating revenue and profit from Latin America several orders of magnitude greater than we did just a couple years ago.”

Pay-TV a Top Player

Outside of Netflix, pay-TV operators are the primary facilitators (due to fiscal leverage and content agreements) of SVOD and transactional VOD platforms in the region.

DirecTV, the No. 1 U.S. satellite TV operator is also the largest pay-TV operator in Latin America with 18 million subscribers. The segment is so important, AT&T, which has made a $48.5 billion offer to acquire DirecTV, agreed to relinquish its minority stake in América Móvil to appease regulators.

Indeed, while DirecTV’s Latin America unit generates just 20% of DirecTV’s overall revenue, it has accounted for 95% of the satellite TV operator’s total subscriber gains over the past few years — one reason for its appeal to AT&T.

“Latin America has an under-penetrated pay-TV market — about 40% of households subscribe to pay-TV — and a growing middle class, and is DirecTV's fastest-growing customer segment,” AT&T said in a statement.

Separately, DishLatino is streaming 56 World Cup matches for Hopper subscribers featuring the main Spanish-language feed plus four additional camera angles for full-field match viewing. Hopper’s Game Finder app will be updated for the World Cup to help viewers keep tabs on the competing countries, including the United States.

"Soccer is the world's most popular sport and … we wanted to give our customers the ability to easily follow the teams they love,” Jimshade Chaudhari, director of digital product marketing and management at Dish Network, said in a statement.

IHS’s Cooper said the influx of over-the-top video and subscription streaming in Latin America is slowly blossoming beyond a niche market among a middle class enamored with the traditional bundled channel plan. He said this new evolution in terms of what pay-TV operators are providing subscribers is complementary to the existing premium channel ecosystem.


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